Ahhh Late Autumn!!! The leaves have fallen. There are the aromas of pumpkin pie in the oven and warm apple cider on the stove. And if you listen carefully, you can hear managers and accountants grumbling that “it’s budgeting time again!!” Yes if your company is on a calendar-year basis, it’s likely budgeting time.
For many companies, budgets are still used as a planning tool, but an increasing number of companies are choosing to forego budgeting. That seems to be a pretty radical idea, but let’s investigate why they’re doing that and what’s replacing their budgets.
Historically, budgets have been used as a means to measure company and management performance, used as a tool to reduce costs and are sometimes needed by public companies to inform shareholders, influence market price and in certain cases, to meet regulatory purposes. But is the budgeting process really worth the effort? A lot of time and expense is consumed creating the budgets and often their quarterly revisions. By some accounts, managers spend 20 percent of their time on budgeting during the course of a year; that’s two and a half months!
Often the budgets are generated from the lower levels and across multiple divisions of a company upward through its business structure; resulting in silos of budget data that often don’t have an overall corporate long-term strategy in mind. These budgets often lead to low goals. For example, the sales department may low ball their sales-revenue estimates since their bonuses will be based on meeting and exceeding the budgeted revenue. On the expense side, after the budgets are approved, managers will often spend their budgets in fear of not getting the same amount or more the next year.
The budget information is rarely normalized across the departments and sites, and often it’s adjusted or “massaged” by subjective percentages at each point along its journey up the corporate structure. So in the end, a company tries to run itself based on numbers that have in some cases taken months to formulate (and are already likely obsolete), are often focused on short-term goals and act as a restriction to success—“don’t exceed the budget!!”
New Approaches to Budgeting
So is there a better way? Yes, many companies think so. Since most budgets seem to take into account short-term goals, e.g., one-year periods, some companies are using rolling or overlapping budgets to plan for shorter-term projects; many of which will start in one year and be completed in another. But there can still be the application of subjective percentages and other restrictions to success. So they’re better off than before, but can it be better yet? Yes. Innovative companies are foregoing traditional budgets in exchange for strategic management, benchmarking and balanced scorecards. Let’s look at each of these.
Strategic Management analyzes key initiatives of the company. It involves identifying the company’s vision and objectives, then creating policies and plans in relation to shorter-term projects intended to realize those objectives. Once the vision and objectives are identified, the company then allocates sufficient resources in terms of financial, technology and personnel resources. It’s a continual process that evaluates the company’s industry, themselves and its competitors; and sets goals and strategies to meet those competitors and other industry challenges. Failure to do so quickly can result in a fast demise.
Look at how fast e-readers changed the book-buying and reading experience. Sony debuted the first viable e-reader (the Librié) in 2004 followed by the Sony “Reader” in 2006. These were met with limited success. In 2007, Amazon offered its first version of the Kindle, and the first lot sold out in less than six hours! Keep in mind also that Amazon is really a content provider. Another content provider, Barnes and Noble (B&N), issued its reader, The Nook, in 2009. Apple debuted the iPad in April 2010 and also provided e-book content. Plus they supplied a Kindle app through their online store. We all know how successful the iPad has been. One month later, May 2010, Borders finally debuted its reader, the Kobo, but by then it had lost so much market share to Amazon, B&N and Apple that they could no longer remain viable in the marketplace and have since gone into bankruptcy.
Strategic-management questions for a company to consider:
- Are the goals specific, measurable and time limited?
- Are the goals challenging yet flexible?
- Are the goals achievable and cost-effective?
With Benchmarking, a company’s management team identifies the best companies in their industry and compares the results and processes of those target companies to their own results and processes. The goal is to determine how the winner got to be the best and what must be done to get there themselves. It forces a company and its managers out of their comfort zones, opens them up to new ideas and can lead to a path of continuous learning not only for the employees, but for the company as a whole. But many companies make the mistake of benchmarking as a standalone activity. It must be done in conjunction with a plan to change—the previously discussed Strategic Management.
Some benchmarking questions that companies need to ask themselves include:
- Who are our competitors?
- Where do they stand?
- What standards or benchmarks should I measure against and how?
The balanced scorecard is another management tool to measure strategy performance. Often it’s a mixture of financial and non-financial data compared to a specific goal or target that provides further insight to the company’s vision and mission. It captures germane data and summarizes it for the reader. Note that above I mentioned non-financial data. In order for the scorecard to be “balanced,” it can’t just reflect financial data like a budget would; it must contain statistical data also.
Thus, here are some questions that companies should ask themselves:
- Have we recruited quality employees?
- Are we keeping our employees trained in the latest skills?
- Are we creating quality partnerships between our company (employees) and our customers?
- Are we creating high-quality products and services and doing so with maximum efficiency?
- Are we meeting (and hopefully exceeding) our customers’ expectations?
- And finally a financial related question: Are we maximizing shareholder value?
A balanced scorecard transforms a company’s strategic plan from what often becomes a passive document (or a poster on a wall) into “marching orders.” It aids managers in identifying what must be done and empowers executives to truly accomplish their strategies.
Getting companies to drop budgets requires a different mindset, and it’s easier said than done. Perhaps reading this blog has caused you to at least question whether there may be a different and better way for your company to manage itself than creating a budget and valiantly trying to follow it for three months, six months or a year.
A number of books about Strategic Management, Benchmarking and Balanced Scorecards are available. Amazon is a good resource for these, and some are available for the Kindle.