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Budgeting for Guidance, not for Control
Jagdish B Acharya, Premium Member
Budgeting by itself is not bad. It is the importance that some organisations give to budgeting that may drive some to despise it.
Without budgets we would be playing hockey and reacting to stimulus with no idea of impact of step. With budgets, management knows if it is in control.
Using budgets for centralized control has lot of disadvantages. The business environment is changing so fast that a decision about the future has all likelihood of going wrong unless it has flexibility. Budgeting figures are calculated much in advance and cannot and should not be used for absolute control. In an organisation culture where budgets are considered sacrosanct, people try to project beyond practical limits and justify end by spending accordingly. This can lead to situations where innovative ideas are not pursued because they could not be envisioned earlier.
Decisions should be based on current, not budgeted Evaluation of the need and should only be guided by overall budget.
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Use Budgeting for Guidance, but not for ControlPaul Steele, Member I agree the problem with budgets is they are based on historical data and information and best 'guesstimates' where annual management thinking attempts to impose this financial plan on the operations of the business.
At best these forward estimated plans should be used as guidelines not imposts.
Like all plans, financial, budgets etc, they should be taken with a grain of salt, good practice guidelines but not be an imposition for cutting staff and service delivery capabilities. |
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Budgets Lead to Suboptimal Gains When Overused for ControlJagdish B Acharya, Premium Member Budgets often are done at departmental levels and act as control tool. In changing scenarios, departmental goals, if pursued strictly as per annual past analysis, may just ensure departmental successes. But in many cases this may not be resulting in organizational successes.
Combining budgets with functional goals may reduce this limitation and may lead to better overall success.
Overemphasizing budgets often leads to this problem. When budgets are treated as one parameter of business plan, they are useful. |
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