From my earliest days in my finance career I have never been a proponent of the mind numbing laborious task of budgeting. I guess I was never part of the typical accountant stereotype of accountants; ‘number jockeys’. I guess my alienation from the stereotypical accountant was rooted in my education, it was devoid of budgeting. It wasn’t that the process didn’t exist, it simply wasn’t taught. I often wondered where this ‘strange’ habit of budgeting found its origins.
In the mid 1990’s there was a movement away from the horrifically painful process embraced by those crystal ball readers. The new age model was based on projections, and rolling forecasts not prophesying about the future. The early adopters of these new finance tools became the evangelists of what was perceived as a better way of running businesses. Their core motivation for the escape from budgets was ‘agility’, the ability to change corporate direction at the first glimmer of a new opportunity.
Through the 1990’s and into the new millennium this new paradigm never took on pandemic dissemination. In principle it sounded good but it was the ‘betamax’ of the finance world. This redheaded step child eventually found its demise as the new millennium brought unprecedented economic downturn. The budget was not replaced; it survived the holocaust of progressive thought.
Like any yin-yang duality, innovative thought has again made its resurgence and once again attacking those crystal ball gazers. As it turns out, the rolling forecast of the 1990’s has arisen from the ashes and has gained tremendous momentum with the elite of progressive organizations. None a better time when the global economic is seeing some thread of international competitive advantage; this time, only the most progressive organizations are demonstrating that ‘Bud don’t know Jack’, February 2012).
According to Professor Kenneth Merchant at the University of Southern California’s Marshall School of Business, there are at least 100 companies across the globe that have or are in the process of replacing the budgeting process for more agile and timely reporting. The anti-budgeting Czar, Steve Player, contends that the budgeting process is a huge waste of time and it is part of the ‘dumb’ stuff that finance does. The process of budgeting is riddled with faults from its very inception! In the most conservative organization managers attempt to predict the future by building an illusion of the coming year. On the more liberal side, executive management establishes a target, say 25% growth, and managers rub the genie’s lamp and magically produce the smoke that satisfies those requirements. Like smoke, the budget never endures for the year much less a few weeks if any. According to John Hrudicka, CFO of Elkay Manufacturing, “With a budget, you’re requiring the company to stick to plans with little or no appreciation of how the world has changed”. To take it a step further, how the world WILL change!
Player professes that budgets are based on assumptions that are ‘wrong’. Therefore budgets are nothing more than building an empire on quicksand. From a completely objective position the entire budgeting process is an expensive exercise in time wasting which ultimately strips management of accountability. When management creates budget they either become tied to easily achieved targets, stripping them of motivation of achieving greatness and the organization suffers from seizing opportunities to create real value. At the other extreme, ‘progressive’ organizations are driven by unattainable budgets goals developed completely with no regard to the ‘economic world’ end up demotivating or completely decimating their labor pool as the goals set are completely unachievable.
In his book Winning, Jack Welch famously griped: “It [budgeting] sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity”.
With all of the knowledge abound, knowing that budgets are obsolete the moment the toner dries the last line, why do organizations continue to worship at the budgetary alter. I guess the problem rests with stepping out of the comfort of ‘we’ve always done it this way’. Pat Hensley, CFO of Holt CAT (a caterpillar dealership in Texas since 1933), puts it well with ‘A budget is like a cockroach-you think its dead, but then you have to spray more Raid on it’.
As in the 1990s, only those organizations that have the desire to achieve greatness have buried the budgetary beast and have revived target setting and action planning. To be truly progressive and adopt the agility to achieve greatness the organization must break free from the Alcatraz of Budgeting, because only the best will survive the new economic world order...