Posted by: knightbird | January 18, 2011

Beyond Budgeting

If you are involved in putting together and monitoring budgets in a for profit business, you know the frustration I am writing about because you have experienced it. Jack Welch spoke this about the budgeting process:

“Okay, you can set marvelous goals, but what does it take to reach those goals?

It takes an atmosphere where a goal doesn’t become part of the old-fashioned budget. The budget is the bane of corporate America. It never should have existed. A budget is this: If you make it, you generally get a pat on the back and a few bucks. If you miss it, you get a stick in the eye–or worse.

Making a budget is an exercise in minimalization. You’re always trying to get the lowest out of people, because everyone is negotiating to get a lower number.”

Budgeting is an incredible waste of time, money and effort. According to a European author[i], the amount of time spent on budget development is substantial.

“…the time managers and controllers spend creating the budget is enormous. According to a study by Hacket Benchmark, enterprises spend on average 25,000 person days on planning and performance measurement per US$ 1 billion turnover. According to another study (by KPMG) the budgeting process takes up 20-30 percent of managers’ and controllers’ time. Consultants at Horvath & Partner in Germany estimate that controllers use at least 50 percent of their capacities for planning and budgeting. At the same time, budgets are quickly losing their relevance today and are outdated by reality, which makes them appear even more questionable.”

The method great companies are transitioning to is “forecasting.” Forecasting is accomplished by the Finance Manager with a fraction of the resources. Forecasts are “rolling” which means that they are updated regularly as new information is uncovered. A company typically covers 5 quarters, and the calendar year is rendered irrelevant by forecasting.

Wouldn’t you like to eliminate the huge cost of budgeting and allow your managers to pursue value added work? I sure would. So do the companies listed” American Express, Charles Schwab & Co., Discover Financial Services, Kaiser Permanente, Park Nicollet Health Services and MasterCard International, among others. Unfortunately Chugachmiut cannot join this group because we are tied to the budgeting requirements of the federal government.


[i] “Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century?” by Jürgen H. Daum*

 

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Responses

  1. […] This post was mentioned on Twitter by Mark Graban and Rebecca Sugrue. Rebecca Sugrue said: Beyond Budgeting « Lean in Alaska Blog: It takes an atmosphere where a goal doesn't become part of the old-fashi… http://bit.ly/e7SnHc […]


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