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Why Budgeting Fails

Have you ever tried perfecting your budgeting plan only to find that it failed you? Well, the biggest reason why budgeting sometimes fails is that one management system is not enough. Often times when people or companies create their budgeting plan they don’t realize how inefficient the system they’re using is.

Traditional budgeting processes take too long and consume too many management resources. According to recent research, senior managers spend up to 20% of their time on budgeting and that time spent can be as high as 50% for finance departments.

Another reason budgeting fails is that the system company’s use quickly becomes obsolete. Budgets quickly become outdated once they’re created but this doesn’t stop people from trying to hit those outdated numbers. Budgeting with one management system also doesn’t motivate the right behaviors and most fail to move people to act in the best interest of their company.

Using one management system for your budgeting efforts makes your budget out of sync with the strategic plan of your company. With traditional budgeting, you put emphasis on financial performance over the pursuit of company strategy. This forces managers to put all their attention on the next year-end rather than supporting medium-term strategy execution. This not only makes managers reluctant to spend money on strategic initiatives but traditional budgeting oftentimes is not linked to strategic planning causing it, more times than not, to fail.

So, how exactly has budgeting changed and how can you guarantee that your budgeting efforts not only don’t fail but are linked to the strategic plan of your company? Well, traditional budgeting focuses on three things:

  • Coordinate the organization’s financial activities and picture
  • Communicate financial expectations
  • Motivate managers to act in the company’s interest

While budgeting still has a very important role to play in the financial management of companies, it also can’t be isolated from strategy execution. The main problem with traditional budgeting is that this approach is no longer suited to the realities of today’s dynamic marketplace. If your company is still relying on a traditional budgeting system, especially if your market changes rapidly, you’re headed down a budgeting road of failure.

Luckily, though, there are six new guiding principles for an advanced budgeting system you can follow to ensure that you optimize the role of budgeting while supporting the strategy execution of your company.

These six new guiding principles include:

1. Align budgeting to strategy. When it comes to many companies, their strategic planning, operational planning, and budgeting are disconnected. With an advanced budgeting system though, you’ll be able to integrate the planning and review processes of your company to guarantee success.

2. Link relevant non-financial performance measures to budgeting. With a state-of-the-art management system, you’ll be able to not only focus on important drivers but also link them to financial results represented by your budget.

3. Reduce detail through the use of aggregated budgets. With a new management system, you’ll be able to get rid of lengthy and time-consuming excess detail that sidetracks management from focusing on major success factors and performance drivers.

4. Use rolling budgets instead of fixed budgets. Once you’re able to get rid of your over detailed budgets, you’ll be able to transform your annual budgeting exercise into a continual planning process.

5. Use relative targets instead of a fixed budget to reward people. With a new management system, you’ll be able to measure success by comparing manager performance against relative, self-adjusting performance measures, instead of encouraging managers to meet their fixed budget.

6. Increase the focus on processes instead of on departmental and organizational unit performance This not only reflects the idea of managing processes to drive success in the marketplace but also focuses management on major cost drivers, not single cost figures.

It seems that traditional budgeting is dying out, possibly because it oftentimes fails leaving companies scrambling. It is predicted that by 2025, the most successful companies will be held together by strategy rather than traditional budgeting. If you want your company to be successful and stay successful, it’s essential that you adopt new management systems to prevent budgeting failure.