Performance Management without Traditional Budgeting

7 reasons why traditional budgeting is here to stay

 by Wolf-Gerrit Benkendorff

Regularly in fall, the budgeting process paralyses entire organizations. Both, public and private companies suffer equally from the budget fever. The first signs of this fever are often already significantly noticeable in the summer.

But why has the traditional budgeting system overcome the past decades mostly unaltered? Why did alternative concepts, such as Beyond Budgeting not gain substantial foothold yet? Here are the 7 most important reasons for why traditional budgeting will persist in the future:

It cannot be simpler

The traditional budgeting system is easy to use and easy to understand. Budget goals are negotiated and determined, before the fiscal year begins. Deviations from these goals are being measured and recorded during the year. At the end of the fiscal year, things are being settled: In many cases, companies are willing to pay a bonus, if these goals were exceeded. This is easy to understand and from a mathematical point of view, the knowledge of the basic arithmetic operations is enough.

The worldwide standard

Since General Motors has introduced the first budgeting system 100 years ago, it has developed to a worldwide standard for the management and control of a company. Each manager has grown up with this system. It is the essential basic repertoire of employees in the fields of finance and controlling and is faithfully passed on to next generation of experts.   

A puzzle, where all pieces match

The traditional budgeting system is coherent. This can easily be seen from the example of the forecast: If you have to reach agreed upon goals by the end of the year, then you will be most interested (often exclusively interested) in the expected annual result. It is exactly this information, which is provided by the year end forecast, which is thus the right puzzle piece in the traditional budgeting system. Rolling forecasts are often rejected by the traditional budgeting system, just like a foreign matter. Why should I already start thinking about next year? This will only distract me. First, I need to reach my goals for the current year! 

The riskless alternative

Would you abandon a proven and simple system, which in addition represents the worldwide standard? Probably not. Holding on to the worldwide standard is the riskless alternative for you. Nobody will ever blame you for holding onto the standard.   

No pressure from the markets

When it comes to products or services, the market signalizes, when it’s the right time for (radical) changes. Processes without any market orientation lack these signals. That means that the external force for basic changes is missing, too. Instead, one rather takes the path of optimization.

Patent solution for the optimization

The optimization of traditional budgeting systems is often according to the original Olympic motto: Faster, higher, stronger. The budgeting system is not categorically questioned, but tuned. Thus, it can be precisely determined, which change must be brought about. In general, it is about performing the budget process faster and with less effort and about providing more data for analyses.

It is never the right time

Under favorable economic conditions there is no need to change a proven system, let alone to question it categorically. Under bad economic conditions, we are at first active, where the market requires for it. In processes without any market orientation, you don’t want to make any experiments (see “No pressure from the markets”). You stick with the riskless alternative (see “The riskless alternative”) and use patent solutions to reduce the effort (see “Patent solutions for the optimization”).

The traditional budgeting system has been criticized for a long time. Furthermore, the call for change becomes louder with the increasing volatility, uncertainty, complexity and ambiguity (also called the VUCA world). However, if you take a look at the 7 reasons above, it becomes clear why the next budget fever in fall is as sure as a cold.

Do you know more reasons, why the traditional budgeting persists? Please feel free to send me your feedback and I‘ll be happy to extend the list!