Annual Corporate Budgeting - is it the most ineffective practise in management?

Why?

• Hidden opportunities
• Stunts growth
• Unproductive behaviour

You need financial planning, just not in the way it’s mostly done!

• Align employees with shareholders
• Put growth, energy, fun into financial planning and inspire people to stretch.

Trust and candor are needed for it to work.

Budget meetings usually go two ways:

1. Operations – devise budget. Assumptions have one goal – minimise risk and maximise bonus. Goals can absolutely be hit. Most companies reward for hitting budgets.

Senior management – rewarded for increased earnings. They want significant growth in sales and profits.

At the big budget meeting – both state their cases to support their arguments. After a marathon meeting, both look for a negotiated settlement. Both think that they have gotten something they can bear with.

2. Operations present budget with lots of interesting ideas and leave the meeting. After the meeting closes senior management decide on their own how much the business really gets. Management believes decision making is at HQs only.

Link to strategic planning process and focus on:

• How can we beat last year’s performance?
• What is our competition doing and how can we beat them?
• Come up with growth scenarios.

Compensate individuals and businesses that are not linked to performance against budgets. But link to performance against last year and against competition, taking real strategic opportunities into account. 

Internal audit can review the budget process for linkages to strategic objectives and vision, input from departments that look to stretch their capabilities, how they can help achieve corporate’s strategic goals and how they process can be more efficient with best practises.