I recently chaired a conference on budgeting. The best presentation came from Svenska Handelsbanken, who has operated without a budget for around 30 years. There is a strong and growing view among consultancies that budgeting has had its day.
How can this be?
The first complaint is that budgeting simply takes too long. It’s as if the English rugby team, during the second half of the game against France, goes into a huddle to discuss tactics for the forthcoming game against Scotland.
The second significant issue is that the process is flawed. The budgeting process is nearly always one of negotiation and fiddling, rather than openness and clarity.
And the budget is too short term. It has little to do with value creation, and to a large extent it is in conflict with the more uplifting activity of strategy setting.
The main counter-argument is that you simply can’t do without a budget. But you can. The main purpose of a budget is to be compared with the actual results shown in the management accounts. Easy. Just use last year. The figures are more accurate and results are reported externally in this way in any event.
You do need a current forecast for many purposes. But it doesn’t have to be a full-blown line-by-line budget.
Proponents claim the budget is often an integral part of the process of giving authority to certain transactions. However, over the years this has caused tremendous confusion because the difference between budgeting and the rules on authority is often indistinct. Separating these two would be a great advantage.
Surely the main argument is that the budget simply gets in the way of management’s key task, which is to look into the future and ensure it will be value creating. Almost all of our systems support has been constrained into the straitjacket of budgetary control.
In the next decade, we will find more of a focus on software that helps us to investigate interactively the relationship between cause and effect, and between business drivers and bottom-line outcomes.