Budgeting is one of those business practices that is great in theory but often deeply flawed in terms of the way that it is put into practice. It should provide complete transparency on costs and outputs across an entire organisation and a joined up picture of how these relate to each other.
It should also act as a sort of contract in terms of spending goals and the return that the business gets on that investment. And yet, budgeting can be an obstructive and out of date process that often stops enterprises from being truly agile and innovative. So, how can you set realistic financial targets that provide direction but don’t hold the business back?
What are the issues with the reality of budgeting?
It depends to a certain extent on the organisation. However, budgeting often runs into trouble when it comes to reality and may end up as a rigid process that can reinforce organisational silos. Much of this stems from the idea that the budget is something that is only ever set by the people at the top of the management tree. It is drawn from a bird’s eye view of the business, as opposed to being informed by those who are dealing with the day-to-day reality of financial restrictions.
Budgeting can also be incredibly black and white – this is the money available and this is the end goal. A budget drawn up at management level may (simplified) be a goal to spend £X in X years to generate £X revenue and save X man hours per day processing. Plus, it’s very time consuming – particularly in large organisations, drawing data from across the business to input into the budgeting process can take months. At the end of the process all of the information that has been used may be completely out of date.
Moving away from traditional budgeting towards realistic financial targets
Ensuring alignment between budgets and strategy
If your business vision focuses on specific outputs but no resources are dedicated to this in a budget the disconnect will soon become obvious. So, it’s essential to ensure that there is alignment between financial planning and strategy.
Involving others throughout the business
Input into budgeting processes from others below management level can have a big impact. For example, those who understand and appreciate the customer journey may be at the coalface of the business, not in the management offices. They may be able to provide essential input in terms of where resources could be best used to deliver projects to make the difference that was originally intended, creating more realistic financial targets as a result.
A more fluid budgeting process
Where a budget is locked in and inflexible it will instantly halt a project that doesn’t deliver what was intended first time around. A more fluid process of more flexible budgeting could open the door to much more innovation by allowing for additions and changes, as required.
Setting realistic financial targets today means moving away from the traditional approach to budgeting as rigid, management-driven and locked in. A more flexible, agile approach could have transformative results.