Budgets – a time-consuming exercise of limited value & the most ineffective practice in management
To be frank, I see budgeting as a time-consuming exercise of limited value – and essentially, the most ineffective practice in management. Luckily, there are a few big hitters who agree with me: “budget suck the energy, time, fun, and big dreams out of an organisation. It hides opportunity and stunts growth. It brings out the most unproductive behaviours in an organisation…. in fact, when most companies win, it is in spite of their budgets not because of them’. Who said that? None other than Jack Welch, former CEO of GE.
Let us look at the charge sheet against budgets. First, what exactly is a budget actually? A target? A forecast? A dispassionate way of allocating capital resource? In my experience, budgets are an illusion based on guesswork and corporate politics designed to give the finance folks a false sense of control.
Second, budgeting processes such up unbelievable amounts of time – months in some cases. In many cases, re-working flimsy assumptions changed by events during the budgeting process (Brexit, anybody?)
Third, annual budgeting lights the blue touch paper in management to guarantee that all energy will be spent defending their budget internally rather than actually, say, building great products that customers want.
Fouth, budgets often operate in a parallel universe, divorced from the business plans that it is meant to represent. There is almost zero chance they will read your finely-honed marketing plan. Why do that, when it’s much more to focus on the micro-management of individual line items of the marketing budget?
Fifth, budgets are regarded as the rigid indicator of what is available. Anything outside of the numbers that you pulled of thin air a few months earlier, forget it. ‘Boss, I have found the cure for cancer, but I need £100 to get it to market’. ‘Is it in budget?’ ‘No’. ‘Then get out of my office’.
Sixth – possibly the worse of the charge sheet, it encourages the finance guys to bypass any responsibility for the numbers or have any accountability. True story: I was once called into the CFOs office mid-year, demanding to know why the marketing budget was 20% over. Given that I had tracked the numbers religiously, this was a real puzzle for me. Turns out the Finance Director had not accounted for VAT being part of the cost required for a certain type of media vendor. Guess who got it in the neck for the rest of the year? Hint: not the finance guy whose role it is to know the VAT applicability rules.
Just in case you think I am totally think budgeting is useless, it does have some uses. Targets are good in that they can drive and monitor performance. That’s about it, really. Hence why I think zero-based budgeting is best practice (as noted elsewhere by Mark Ritson), because it forces both side – marketing and finance – to actually think about what they are doing, rather than actually seek to undermine each other. Will I get ZBB on the agenda this Autumn? I’m trying, honestly, I am. Wish me luck!