By means of the annual budgetary exercise, every firm tracks its income, expenditure, profits and projects for a period of one 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 firm how it is expected to do in the future. In due course of time, these expectations can be compared with the firm?s actual performance. That comparison shows the management and other stakeholders how the firm is performing and whether or not the goals are being met.
All this is good. But does the budgeting activity 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 of the Beyond Budgeting Round Table, in his book Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap marks the fixed-performance contract nature of budgeting as the key culprit in making the budgetary exercise counterproductive to the strategic objectives of a firm. 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 next year. So, instead of project potential and business growth driving the budget, it?s the budget that starts running the business.
A stronger emphasis on clearly defined performance benchmarking, coupled with regularly spaced review of business performance would make targeting budget numbers less relevant. CFOs need to replace annual planning cycles with regular business reviews that enable managers to see trends, patterns and breaks in the curve long before their competitors and 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 don t become hostage to policies that look little beyond the short term.
The author is from the 2009-11 MBA batch at IIM Indore