the management mentor

20th November 2015 at 00:00
Breaking the budget

In most organisations, there’s usually no getting away from the annual budgeting cycle. It determines everything from staff pay all the way down to how many tea bags are in the communal kitchen.

Yet for how much longer might this be the case? Unilever, the multinational consumer goods company, Handelsbanken, a major Swedish bank, and Statoil, the Norwegian oil and gas producer, all claim to have completely abandoned (or significantly marginalised) their budgets. Will this catch on in schools?

Arguments against budgets include: constraint on an organisation’s responsiveness; that they are a deterrent to change and underline a “backward-looking” perspective rather than a more strategic outlook; and that budgeting can be time-consuming and costly.

We’ve probably all experienced some of these adverse effects. One that sometimes affects me in the university sector is how expenditure is held back through most of a financial year because the budget is “not looking great”, but then funds get released towards the end of it when things look better financially.

Another not-so-popular characteristic of the traditional budgeting cycle is the length of time between when a budget is devised and the end of a financial year. Frequently, budget figures at the end of a financial year can be in place and fixed for as long as 15 months.

Traditional budgeting is a reliable management tool when an organisation operates in a stable and generally predictable environment. Stability and predictability are, however, rare commodities today – as an extreme example, just think about the usefulness of Volkswagen’s budgets after the emissions scandal. Indeed, in my own research I’ve spoken to several chief financial officers who said that “the budget is usually out of date on Day 1”.

Total abandonment of budgets is probably unrealistic for schools. But they may be able to usefully employ some things from the “beyond budgeting” style of management thinking.

For instance, part of the more contemporary approach is to shorten the budget cycle, normally to a quarterly basis. In so doing, the “rolling” budget can incorporate the most current estimates (for example, costs, fees, other income and so on), and provide managers with a more forward-looking and responsive lens.

The general philosophy behind a life without traditional command-and-control (or “top-down”) budgeting is a shift towards decentralisation, greater empowerment for workers and better day-to-day adaptiveness. This is expected to encourage staff to work towards ongoing improvements – even taking more risks – rather than sticking rigidly to fixed targets.

There’s not much about budgeting techniques that has changed over the past 100 years. But as the environment in which organisations operate shifts continuously, we might begin to question budgeting’s untouchable status.

John Burns is professor of management and accountancy at the University of Exeter Business School

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