United Kingdom

Details

  • Service: Advisory, Management Consulting
  • Type: Business and industry issue
  • Date: 26/06/2014

Leadership and the perceived fear of budgetary failure 

Leadership and the perceived fear of budgetary failure
  • Today’s budgets only provide a static view of performance and strategy
  • Budgets often stifle innovation and conceal poor performance
  • Budgets should not just sit with the Finance team

Should a mature and correctly functioning organisation operate a punitive adherence to budget regimes? I think not. A budget is established at a point in time and reflects the current economic backdrop– something so static cannot, in my view, dictate future performance and strategy.

 

The reality is that some business sections, products or markets will be under or over performing – potentially for reasons which didn’t exist when the budget was created. A balance needs to be achieved between retaining the benefits of budgets in terms of setting targets and monitoring performance and the potential for them to stifle innovation. Rigidly enforced budgets also encourage staff to adopt behaviours which are not in the long-term interest of an organisation, such as postponing investment in order to meet targets. 

 

More than just fine words and lofty ideals

 

I believe that emphasis should instead be placed on transparency and open disclosure of projected variance to budget. For this to work in reality, and be more than just fine words and lofty ideals, budgets and forecasts must be robust and have organisation-wide integrity. There then needs to be a culture where people can confidently exploit opportunities and mitigate risks, whether or not they were identified when the budget was created.

 

The effects of this approach can be profound. For example, in a scenario where part of a business is performing poorly because a competitor has launched a successful product (not yet launched when the budget was created). Where there is a culture of transparency and where failure to hit budget targets is not considered an absolute failure, this issue will quickly be shared and steps to mitigate the challenge can be taken.

 

A culture that encourages bad behaviour

 

Conversely, in a culture where the need to meet targets set out in the budget is rigidly enforced, there is a greater tendency for poor performance to be concealed so that budget targets are met. There is also likely to be a delay in the wider business becoming aware that an issue exists which may make it harder and more expensive to rectify the problem. Valuable time may have been lost, needlessly handing the initiative to competitors.

 

Not achieving budget numbers doesn't always mean outright failure

 

The crucial point in my view is that not attaining the budget numbers is not necessarily a performance failure. It is a failure to recognise the interdependencies between resources and outcomes in the dynamic environment in which all organisations operate.

 

This means that it is important to use a budget to ensure that the use of resources is optimised. This ensures that a lack of resources in one part of the business is not allowed to prevent other parts of the business from performing well.


A static budget is a flawed budget


I do think that budgets have a role to play in establishing a detailed and time-bound view of how strategy can be delivered and targets achieved. However,  the suggestion that they remain static over a period of time is inherently flawed, as it assumes the environment remains unchanged over this period too. I believe that forecasting capability and integrity facilitates this changing environment by providing continuous correction of the chosen course, while still focusing attention on defining initiatives to achieve or exceed the agreed outcome.


The adoption of this culture and way of working calls for a proactive finance function which is a trusted business partner able to win the argument about why this is the best approach to take. The reward is for the budget to stop being a finance-owned administrative burden. Instead, it lies at the heart of a process to determine and support what actions and initiatives staff undertake in order to help the organisation achieve its full potential.

What's your view?

 

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Contact the author

John O'Mahony

John O'Mahony

Director

KPMG in the UK

 

0207 694 1787

john.o'mahony@kpmg.co.uk