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I hear a lot of the time from a lot of different people in business that budgeting is outdated and is not an exercise that provides value. I always find that interesting as the clients that budget tend to be the ones that perform better.
I do think that a valid point is that a fixed budget you set at the start of year and don’t revise is outdated. There are some new trends such as a 12 month rolling budget. The theory behind this type of budgeting is that as long as the performance for the coming month is better than the same month 12 months ago then the business is going in the right direction. However, again I believe there is much more to it than simply comparing a month’s performance to the same month 12 months before. A lot changes in 12 months, look at some of the major economic events such as the GFC or the current price of oil plummeting. You have to evaluate your business within the context of what is happening at the time.
My point is that there are issues with whichever budget methodology you go with but a budget helps measure your performance and make informed decisions. A budget should be revised regularly but only for valid reasons and not excuses. I hear a lot of businesses make excuses about their performance without looking into the real reasons for not performing to the level they were hoping for. If there are significant differences between budget and actual they need to be investigated and not just identified.
Setting a budget can be quite difficult but personally I believe it should be done holistically with the team. A budget that is handed top down with no involvement from the staff is probably going to result in the budget not being worked towards as much as if the team helped set the targets. A self-imposed target is more powerful than one set by management.
