If you only read one thing this week…


Why budgeting fails, and what we can do about it. by ifyouonlyreadonethingthisweek
March 27, 2008, 6:11 pm
Filed under: accountability, Articles, governance, If you have 30 mins, Management

Our own Tori Gilbert summarizes Harvard Business School’s paper by By Prof. Peter Horvath and Dr. Ralf Sauter.

“Summary:

The traditional budgeting process is counterproductive. It is inefficient, rapidly becomes obsolete, doesn’t motivate the right behaviors and is out of sync with strategy. Traditional budgeting is especially not suited to the realities of dynamic markets, making it difficult to implement budget adjustments called for throughout the year.

To be most useful in a dynamic marketplace, budgeting must integrate with and support strategy. The authors propose six guiding principles for an advanced budgeting system that optimizes the roles of budgeting while supporting strategy execution:

1. Align budgeting to strategy.
2. Link relevant nonfinancial performance measures to budgeting.
3. Reduce detail through the use of aggregated budgets.
4. Use rolling budgets instead of fixed budgets—a continual planning process, frequently updated and adaptable to changing conditions.
5. Use relative targets instead of fixed budgets to reward people–measuring success by comparing performance against relative, self-adjusting performance measures. Relative targets can motivate the right behavior, guiding people to act in an organization’s best interest.
6. Increase the focus on cross-functional core processes instead of departmental and organizational unit performance. This leads managers to be more attentive to organizational strategy and goals, and fosters collective effort and teamwork instead of internal competition for resources.

The Balanced Scorecard (see links below) is described as a helpful alignment mechanism. The Balanced Scorecard can supply the coordinating functions for budgets by communicating strategy to managers and give them direction; it can help managers oversee strategic initiatives and link them to financial activities. The BSC’s clear depiction of strategic priorities helps to set firm guidelines for budget planning. When implementing the BSC, it is crucial to de-emphasize the importance of budget-related objectives to the benefit of BSC-related objectives, while reducing the level of detail in the budget—otherwise you’ll only double the work and increase the frustration level.”

Read the article here.

Read the Wikipedia article on the Balanced Scorecard approach here.

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