For many organisations, planning and budgeting is an annual ritual. Once a year a letter goes out from head office describing the company’s expectations, shortly followed by a budget pack to be completed by a predefined date. Once a year these packs are completed and returned, and then the annual negotiation begins in earnest. Head office wants more and the subsidiaries know this, so they have kept something back. But Head Office know they have kept something back, so are trying even harder to increase the budget. Eventually the negotiations conclude and the budget is set for the next twelve months and everyone breaths a sigh of relief and finally gets back to running the business again.

Now I know that this is a bit of a caricature of traditional budgeting and many people are into rolling forecasts and rolling budgets (which hopefully doesn’t mean that the whole budgeting process has to be repeated four times a year), but in many larger organisations planning and budgeting is not seen as adding value. It is slow (Shell for example have a thirteen month budgeting cycle), it is time consuming (according to Hackett group, companies on average are spending 25,000 person days per annum on planning and budgeting for every one billion dollars of sales) and often doesn’t produce a result that is significantly better than we started with. In addition, all the time we are spending on planning and budgeting, we are not spending directly running the business.

Part of the problem lies in the fact that companies use the budgeting system to integrate everything. A budget is supposed to be a plan, but we complicate this. It is also used as a forecast of what will be achieved whilst serving at the same time as a stretch target to motivate management. These different needs are incompatible, so it is no wonder many companies have problems with their planning and budgeting systems.

Recent Complication

Firstly, the increase in global competition is putting pressure on businesses. Companies can no longer rely on their markets and competitors remaining unchanged for many years. The growth of China as a manufacturing base has hit many companies around the world. For those in services, the internet has disrupted some markets and created huge opportunities in others. These rapid changes can make the budget out of date extremely quickly, especially when it is only updated every twelve months.