When Is a Budget Not a Budget?

If you happen to monitor trends within global corporate finance teams, you are likely aware that many firms are changing their budgeting processes. They have implemented rolling forecasts or taken a “later, lighter” approach to their budgets (which sees the finance team start its budgeting later and requires fewer inputs from the businesses). And some hardy souls have actually abandoned their budgets altogether.

Time for a Refresh

However, changing the activities of the budgeting process might not go far enough. Some corporate controllers tell us that they actually want to do away with the word “budget”. The reason for this (as with so many good solutions to business problems) is that these controllers have spent time working out the root cause of their dissatisfaction. As one client puts it excellently in this online discussion thread (see the last post in the list; open to all CEB clients), the corporate budget typically aims to do a mix of three things when it should really only do the third:

1. Forecasting: Predict what will happen in the next year or longer
2. Performance Management: Set targets and reward performance
3. Resource Allocation: Support fixed costs and investments

As we have argued in the past, forecasting is all important and should be done regularly and frequently with division heads and other senior line managers. However, some controllers want to challenge this common corporate belief that forecasting should be a necessary part of the budgeting process. Controllers are also very keen to change the stubbornly rooted idea that the budget should be used as a type of performance contract; the main clause being, “if you achieve this target, we will consider you a success.” This performance contract approach obviously leads to gaming and various other types of numerical manipulation from the line.

The desire to clarify what the budget is and isn’t leads to the desire to change its name to something else. And this is where you come in.

We’d Like to Hear From You…

One client has told us that he’s thinking of changing the word “budget” to “the target”; another was adamant that he wasn’t going to use the word budget but was at a loss as to what to call it instead. We’d like to hear your thoughts – and we’ll obviously publish them below too.

• If you are taking steps to change your budgeting process, do you think that changing the name will improve the way the process is seen?
• Also, if you were to change the name (or if you have already) then what would you call it instead?

If you are a client and want to discuss this further, then please don’t hesitate to contact me.