Budgets – Are they a thing of the past?
According to a recent article in CFO Magazine, companies are embracing the idea of eliminating one of their most time-consuming and hated processes – developing a corporate budget. “Freed from the Budget” discusses companies of all sizes and industries that have eliminated their budgeting practice in hopes of finding a better way to run their businesses. Much of the discussion revolves around the ideas extolled by Steve Player, managing director of the Beyond Budget Roundtable (BBRT) – a group of corporate finance leaders that share ideas on performance management.
As part of BBRT’s message about the problems with budgeting, they’ve developed a list of 10 Reasons for Replacing the Budget:
1. Budgeting prevents rapid response to unpredictable events.
2. Budgeting is too detailed and expensive, absorbing around 20% of management time.
3. Budgeting is out of date within a few months. Key assumptions change frequently, causing confusion and rework.
4. Budgeting is out of kilter with the competitive environment.
5. Budgeting is divorced from strategy. Budgets are based on functions and departments rather than strategic themes.
6. Budgeting stifled initiative and innovation.
7. Budgeting protects non-value-adding costs. Cost budgets are usually compiled and agreed on based on prior-year outcomes.
8. Budgeting reinforces command-and-control. Budgets were designed to enable functional leaders to manage the organization from the center.
9. Budgeting demotivated people.
10. Budgeting encourages unethical behavior and increases reputational risks. Aggressive targets and incentives drive people to meet the numbers at almost any cost.
While the article highlights a handful of companies, most are wary to eliminate this essential business task. So, what do you think – are budgets a thing of the past, or do they have a relevant place in an organization?