Traditional budgeting is frequently perceived as an unpopular, ineffective, and outdated business process. Despite this perception, many organisations persist in using it. Stephen Hambling talks about the reasons accountants and finance professionals still use traditional budgeting and provides valuable insights from a Kybos LinkedIn Survey.
Why do organisations budget?
Organisations budget because it serves as a crucial control mechanism, providing a structured framework to assess, manage, and guide the financial direction of a business. This process involves setting financial targets, allocating resources, and monitoring performance against these benchmarks to ensure that the organisation remains on track to achieve its strategic objectives.
Is traditional budgeting necessary?
Traditional budgeting is frequently perceived as an unpopular, ineffective, and outdated business process. Despite this perception, many organisations persist in using it, largely because they believe there are no viable alternatives available. This reliance on traditional budgeting stems from its long-standing role as a fundamental component of financial management, ingrained in the corporate culture and processes over decades.
Organisations often view it as a necessary tool for maintaining financial discipline and control, even though it may not align with the dynamic and rapidly changing business environment of today. The belief that there are no other options often leads companies to overlook or dismiss more innovative and adaptable financial planning methods that could better serve their needs in a volatile market. As a result, organisations continue to invest time and resources into a system that may not provide the flexibility and responsiveness required to navigate modern business challenges effectively.
Traditional budgets, by their very nature, are completely static. They are typically developed as fixed financial plans that offer just one of many potential forecasts for the next 12 to 18 months. This rigidity means they lack the flexibility or adaptability needed to respond to unforeseen changes or opportunities that may arise during the fiscal period. As a result, they can quickly become outdated, failing to provide the necessary guidance in a fast-paced and ever-changing business environment.
A volatile business landscape
The business landscape is becoming increasingly volatile, characterised by rapid technological advancements, shifting consumer preferences, international politics and global economic fluctuations. This dynamic landscape necessitates more flexible and adaptable financial strategies that can accommodate sudden changes and allow businesses to pivot quickly when necessary. Consequently, traditional budgeting is no longer adequate for many organisations. There is a growing consensus and trend towards exploring alternatives that offer greater agility and responsiveness. These alternatives, such as rolling forecasts and dynamic planning models, are designed to provide a more accurate and timely reflection of the business’s financial position, enabling better decision-making and strategic planning in an unpredictable world.
The overall finance cycle has remained largely unchanged for years, adhering to traditional methods and processes that have been in place for decades. While this cycle has stayed the same, there’s no denying that the world around us has evolved significantly. This realisation leads to the question of whether it’s time to reconsider our approach to budgeting. As businesses face increasing pressure to adapt to change, the static nature of traditional budgeting may no longer suffice. It prompts us to explore whether our current financial practices are equipped to handle the complexities and uncertainties of today’s dynamic business environment. Are we clinging to outdated methods out of habit, or is there a more effective way to manage our financial planning that aligns with the fast-paced world we operate in?
LinkedIn accountant survey
Kybos conducted a comprehensive survey on LinkedIn, which unveiled some alarming insights into the current state of budgeting practices within the finance sector. The survey results indicated that a staggering 80% of accountants surveyed believed that their meticulously crafted budgets became obsolete within a mere three months of their creation. Even more concerning, 40% of these professionals felt that their budgets were outdated after just one month. This data highlights a significant inefficiency in the traditional budgeting process, as it typically takes finance departments and accountants at least three months to develop a budget. This means that by the time a budget is finalised, it is already on the verge of becoming irrelevant, rendering the substantial time and resources invested in its creation largely ineffective. This situation underscores the urgent need for a reevaluation of current budgeting practices and the exploration of more dynamic and adaptable financial planning methods that can keep pace with the rapidly changing business environment.
Beyond Budgeting
If you’re interested in this subject, there’s a book The Little Book of Beyond Budgeting by Dr Steve Morlidge who is one of the foremost authors on this topic. Available on Amazon and all good retailers.
About Stephen Hambling,
CEO and Founder of Kybos, a UK based Jedox partner.
I provide simple, clear, commercial forward looking financial support to founders, entrepreneurs and CFO’s of Small and Medium sized companies. Typically I’m the special projects guy, commercial troubleshooting, systems help, M&A or cashflow & turnarounds. I’ve implemented several hundred finance systems. Implementations are not a core skill set for the average finance team, so it’s easy for a project to go off track. Clear simple guidance before, during and after an implementation can make the world of difference.
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Aout Kybos
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