Scrapping the annual budget makes for a better business

2006

Ditching the annual budget makes companies more responsive and dynamic in how they plan their business, allocate resources and control their performance, according to new research.

The study by business research organisation Business Intelligence looked at a range of U.S such as Boston Scientific, Herman Miller, Nordea, Statoil, Tomkins and UBS GWMBBB that had either abandoned the budget altogether or radically altered its role and function.

Companies, it found, were developing a range of solutions to fulfil the roles previously fulfilled by the budget, including quarterly planning cycles, rolling forecasts stretching out five or six quarters, two or three year business plans, top-down target setting and bottom-up planning and balanced scorecard and other performance management frameworks.

Putting in place such changes involved the development of a performance culture where responsibility and accountability was more devolved throughout the organisation, and incentives were de-coupled from budget targets, it said.

"Dissatisfaction with the annual budget is a symptom of a growing crisis in performance management," said report author James Creelman.

"More senior managers acknowledge that the budget, like other methods developed to meet the needs of industrial-age business, is no longer fit for purpose," he added..

"There is still a huge inertia in many organisations to persevere with the budget. But the strain of coping with more demanding operating conditions is forcing them to look for better, more appropriate solutions," he continued.

Among the companies surveyed, Boston Scientific saw a 62 per cent rise in global sales as well as greater predictability in performance after abandoning the annual budget in favour of a 12-month rolling plan, updated quarterly along with other performance management changes, the report added.