Campus Of The Week

Written by Siddhartha Sinha | Siddhartha Sinha | Updated: Dec 1 2009, 04:07am hrs
What does the annual budgetary exercise mean to a company Put simply, by means of this exercise, every company tracks its income, expenditure, profits and projects the resultant set of numbers for a year. Apart from being a sales forecast, the budget also lists the capital requirement to meet the numbers and create further growth. It tells the company how it is expected to do in the future. In due course of time, these expectations can be compared with the companys actual performance. That comparison shows the management and other stakeholders how the company is performing and whether or not the goals are being met.

All this is good. But does the budgeting activity, as we see widely today, actually serve the strategic objectives of the organisation and help in their realisation Many think that this may not necessarily be the case. There is a pervasive belief that too much attention on the budget is actually skewing the vision of organisations in the way they chart out their growth policies.

Jeremy Hope, founder and research programme director of the Beyond Budgeting Round Table, in his book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Harvard Business School Press, 2003) marks the fixed-performance contract nature of budgeting as the key culprit in making the whole budgetary exercise counterproductive to the strategic objectives of an organisation. The budget-centric approach compels managers to spend the entire ration of their allocated budgetary quota, failing which they have strong chances of getting lesser allocation the next year. So, instead of project potential and business growth driving the budget, it is the budget that starts running the business.

A contextual case in point would be how budgetary compulsions put restrictions in the way companies deal with a financial downturn. No matter how justified a cost growth may be, a greater emphasis on meeting the targets set by a budget that responds by tightening expenses makes it virtually impossible to defend a cost growth even when it fits well with the larger business strategy of an organisation.

So, are there any alternative mechanisms or approaches that may serve the purpose of performance planning A stronger emphasis on clearly defined long-term performance benchmarking, coupled with more regularly spaced review of business performance, would make targeting budget numbers less relevant. Jeremy Hope writes: CFOs need to replace annual planning cycles with more regular business reviews that enable managers to see trends, patterns, and breaks in the curve long before their competitors and thus improve the quality of decision making.

Therefore, to address conventional budgeting becoming a hurdle to the strategic management objective, it becomes pertinent that planning review be done more frequently, while ensuring that organisational resources intended to power business dont become hostage to policies that look little beyond the short term.

The author is from the 2009-11MBA batch at IIM Indore and can be reached at p09siddharthas@iimidr.ac.in