A new way of budgeting

Ordinarily, company budgeting is a tough exercise. It consumes volumes of paper and man-hours. It pushes the mind to extremes. It is frequently a mad race to beat deadlines before someone else can collate the sectional budgets into an organisation-wide financial plan.

Studying figures in a 75-page budget document for example, is hardly anyone’s description of an exciting duty. Once done, the document is then presented to the board of directors with deep prayers that they accept it as it is. An alternative opinion could mean being subjected to another round of the punishing exercise.

The average time it takes to develop a worthy financial plan in this manner is about five months.

This approach to budget making has been around for close to a century. It is time it was relegated to the annals of history, not just for the sake of it, but mainly because it ignores the demanding changes that have taken place in the business environment over the decades.

There are companies that have successfully done away with the budget and they aren’t looking back. But then, how does a company survive without a budget? How can it be successful without one?

Studies by Beyond Budgeting Round Table (BBRT) found that some companies had devised new management processes that did not rely on the budget or accountability in the finance department. A good global example is the Swedish bank, Svenska Handelsbanken. The bank, which was established in 1871, has recorded a series of successful financial years.

The success is owed to former President of the bank, Dr Jan Wallander. Described as “a real visionary who could see that the way large organisations were being managed was fundamentally flawed,” Wallander steered a radical devolution in the company.

The first thing he did was to dismantle the budget model that they had. He also changed the organisational culture, removing bureaucracy and top-down control systems. He gave managers the rights to make decisions about their own departments or units. The results were impressive, with the bank recording little employee turnover, low operational costs and a growing shareholder return.

There are organisations that have not dismantled the budget entirely, but have introduced budgeting processes that have both quality planning and flexibility in them. They use the concept of “rolling forecast”. The approach ensures that planning and flexibility go hand-in-hand.

The rolling forecast divides the year into quarters. This allows for easier review and analysis of the company’s performance in each of these time segments. Change and progress can be noted by comparing performance between quarters. This promotes flexibility.

 

How the Balanced Scorecard breaks down budgeting

Budgets can also be automatically steered by the application of the Balanced Scorecard performance management tool. The Balanced Scorecard is built using the mission, values and strategy of the organisation. It has several interlinked objectives, which are added into the strategy map. It also has measures that use the cause-effect relationship to tell where the organisation is heading.

Every objective in the Balanced Scorecard provides information about how to achieve them. This will include details on the allocation of resources, which, in fact, is budgeting. In other words, the Balanced Scorecard breaks down what would otherwise be a complex budget into small strategic resource allocations with timeframes that are specifically dictated by the specific objective.

Using the Balanced Scorecard in budgeting eases the allocation of scarce resources in the organisation. You will be able to easily link what needs the money, when and why. There will be no guessing. You will also be able to see clear alternatives to getting the resources that you need. Secondly, this approach to budgeting makes the whole process easier. You do not need to spend four and a half months crafting a budget.

Linking the Balanced Scorecard with the budget also reinforces strategies. It ensures that resources are allocated based on the set strategies. Moreover, the method promotes cooperation between staff who have to come together to make the budgeting a success.