Do Budgets Provide Control?

Do Budgets Provide Control?

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Last week we looked at how traditional budgets try to plan for the future. Today we are going to look at how budgets try to control the businesses direction. Traditional Budgets try to do this by controlling resources.

Controlling Resources

A traditional budgets tries to control resources by requiring a detailed plan of where each and every resource will be spent before a year begins.

The thought process goes something like this. As an organization, if we get detailed information for every upcoming expense for the next 12 month we can direct the organization and restrict cost by approving or adjusting those costs.

Can the above objectives be achieved through budgeting? Can you really control your organization's direction with a detailed budget and can you trust your managers and supervisors to give you the correct information for that budget?

I have worked in finance now for ten years. I have worked for various sizes of organizations. All of them did variations of traditional budgeting. From my experience, here are the issues I ran into:

  • Departments would take their prior year budget add 3% to it and send it on for approval.
  • No matter how detail or how much effort managers put into the budget.  The executive level management would add a stretch goal (A stretch goal is when the leaders of an organization add an arbitrary percent to the revenue or remove an arbitrary percent from expenses because they fill they are either understated or overstated).
  • Once approved budget managers still have to ask for approval of purchases whether they were included in the budget or not.

What these examples show is a lack of trust in the budget numbers and in the budget managers ability to properly spend money. Because of this lack of trust the detailed numbers are inflated and because the numbers are inflated management tries to adjust them and in the end, requires all purchases to be approved anyway.

Without recognizing it management by its own practices has called into doubt the validity of traditional budget's ability to control an organization's resources.

The question remains how do you control costs and control the direction of the organization.  Simply put, Trust and Accountability. 

Trust and Accountability without a Budget

In the traditional budgeting sense, there isn't much trust when it comes to money. The executive level acts like central planners who have specialized knowledge and skills which the individuals they employ don't have. Therefore, they must make or approve all decision at the organization. 

If you are having trouble with a distrusting organizational culture, it starts at the top. Distrust breeds distrust.

So how do you counteract this cycle?

With good accountability and very clearly defined expectations.

Many people falsely believe that a traditional budget provides accountability and clear expectations. But in reality, it doesn't. 

Expectations should be clearly defined and related specifically to the job you have asked the employee to perform. The outcomes of the expectations should be something which is controllable by the employee. For example, a marketing employee's expectations should be related to the number of lead needed and not total sales. Because marketing is all about generating leads and your sales department is the one who should be accountable for sales. But you shouldn't stop there, you should have a clearly defined definition of what a qualified lead is. One that both the sales and marketing team agree on. That way if marketing is meeting their goals sales can't blame marketing for not reaching theirs.

It goes back to the idea of creating SMART goals.

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Timely

The accountability comes in on the Measurable part of SMART. If the goals you have created for your organization and teams are measurable, then the measurement of those goals should be easily accessible by anyone in the organization. As team leaders and managers, the goals should be used as discussion points for employees and should be flexible. As conditions, in reality, change the goals should change with them.

Conclusion

Traditional Budgets don't help control an organization's direction. Instead, they provide a false sense of security. Traditional Budgets are like the TSA, when tested they have a 95% failure rate, but we keep them around for appearances. Instead of wasting time on budgeting look for new better ways to keep your managers and employees trusting of you and accountable by setting SMART goals.

Additional Resources:

5 Tips for Setting Smart Goals in Your Business Plan

How to Define Long Term Goals

Are Budgets Poor Measurements of Performance?

Are Budgets Poor Measurements of Performance?

Why Do We Budget, and Do Budgets Make Good Plans?

Why Do We Budget, and Do Budgets Make Good Plans?