Budgeting is a great discipline as long as it is self-imposed. An individual can set a limit on spending for themselves. The decision can be reached by taking into various factors that may or may not include financial goals. But the world of business is all about making profits while navigating the complex and competitive marketplace. Can the (self) discipline of budgeting prove to be effective for businesses? Here are five factors that point the other way:
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It is based on assumptions
Budgeting is done based on assumptions about the future. This alone weakens any argument supporting budgeting. A sudden toppling of a government, an outbreak of a deadly virus, fluctuations in the currency value, many unforeseen factors impact businesses. Budgeting can never make space for unforeseen events accurately.
Dean Meyer, one of the proponents of performance-based budgeting, says that budgets cannot support sound financial decision making because they do not accurately reflect the full cost of individual projects and services, as stated in accounting web.com.
Time consuming
Budgeting takes up a lot of productive time, especially in volatile business conditions. Not only does it take up time, it also incurs expenses in terms of manpower and infrastructure.
“I see budgeting as a time-consuming exercise of limited value. It is, essentially, the most ineffective practice in business. It sucks the energy, time, fun and big dreams out of an organisation. It hides opportunity and stunts growth. It brings out the most unproductive behaviours in an organisation, from sandbagging to settling for mediocrity. In fact, when companies win, in most cases it is despite their budgets, not because of them,” says Jack Welch, former CEO of GE, as stated by Marketing Week.
Restricts thinking
Budgeting puts a cap not just on spending but also restricts thinking in a big way. Budgeting can cripple creativity and curb risk-taking, leading to a decline in overall growth of the business.
AT Kearney consultant Robert Gunn says, “'When you're controlled by a budget, you're not controlling the business,” as Thomas A Stewart and Vivien Fauerbach quote in their article, ‘Why Budgets Are Bad For Business’.
It can lead to unnecessary spending
Sometimes, a department may end up receiving more than it needs. Managers, under pressure to spend the excess, may retort to irrelevant, low-impact, high-expense campaigns. This can have a negative impact on the brand image.
According to a research paper submitted by Jeffrey B Liebman and Neale Mahoney at the The National Bureau of Economic Research, an American private nonprofit research organisation, Many organizations rush to spend excess funds on low quality projects at the end of the year. The document shows that spending in the last week of the year is 4.9 times higher than the rest-of-the-year weekly average.
It lays emphasis solely on financial outcomes
Budgeting can narrow the vision of a business by bringing down the focus to profits alone. This can lead to a disconnect with customer-centric growth initiatives.
According to Harris Interactive, 89 percent of customers who have an unsatisfactory experience will take their business elsewhere. Winning them back is going to cost several times more than it does to acquire and retain them.