Industry expert Paul Sharman and Prophix CFO Darren Griffith continue to discuss the evolution of budgeting. In this post, Paul and Darren reflect on how the outcomes of budgeting have evolved.
Darren Griffith (DG): By its very nature, budgeting always sparks some kind of action. The truth is that along with intended actions, budgeting creates unintended consequences for companies. How have these changed over the last few years?
Paul Sharman (PS): Let’s begin by considering the heyday of budgeting – i.e. from the 1970s through the 1990s. During that period, there were many positive outcomes of the budgeting process. For instance, budgeting created department plans that clearly articulated performance expectations for managers. Another outcome of the budgeting process was the development of common reference points for encouraging operational alignment across a company.
But budgeting unintentionally fortified a rigid type of mindset. Once budgets were set, they became the touchstone against which all actions were determined to be reasonable or desirable. Flexibility to respond to changing market conditions, evolving regulatory conditions, or fluctuations in organizational performance was dramatically reduced. By extension, budgeting discouraged managers to consider or explore any innovation that had not been previously anticipated.
DG: It was during this time that budgeting also created end-of-year binges, producing a ‘use it or lose it’ mentality.
PS: Quite so. Essentially, budgeting unintentionally encouraged managers to spend irrationally. This is the ultimate irony when you consider that budgeting is thought to ensure responsible behaviours.
DG: Today, it’s quite inspiring to see that Finance professionals’ expectations about budgeting outcomes have evolved. There is a real recognition that short-term goals must lead to achieving long-term strategic goals that increase shareholder value.
PS: That is a fundamental and cataclysmic shift. And the result: the key budgeting outcome is now organizational nimbleness. That translates into plans and goals that are constantly being revisited and updated relative to changing business conditions. Related to that, department and functional managers are increasingly being recognized for, and empowered to, innovate in ways that businesses achieve their strategic goals — rather than merely emphasizing the tactical.
DG: Looking ahead is even more encouraging because operational alignment itself is becoming an outcome of budgeting.
PS: That is the Holy Grail. The good news is that it is in fact achievable. Finance professionals are quickly tapping into the power of automation. That automation serves as a key catalyst that reshapes the outcome of budgeting from static, annual, cumbersome, painful-to-create documents into integrated financial plans – living-breathing plans that effectively weave together strategic goals, operational plans, and financial plans.
In upcoming blogs, Darren and Paul will reflect further on how budgeting is evolving.[tabs slidertype=”simple”] [tab]Note: In Evolution of Budgeting (Part 1) how the purposes of budgeting have changed was examined. In Evolution of Budgeting (Part 2), the focus was on how budgeting process and related technologies have progressed.