Why annual planning and budgeting is broken

Why annual planning and budgeting is broken

By David Parmenter

The annual budgeting/planning process is part of the trifecta of lost opportunities for a corporate accountant.  The other two being the year-end accounts and the monthly accounts processes.  All three exercises keep the corporate accountant locked into processing and reporting leaving little time for added value activities.  It is interesting to note that we seldom get thanked for preparing the annual accounts, for controlling the annual planning process or for preparing the month-end accounts.

In fact, I believe that annual planning, as businesses use it today, is one of the greatest mistakes companies have made since 1494, the year Pacioli wrote about  double-entry bookkeeping in Summa de arithmetica, geometria, proportioni et proportionalità. We need to do it quickly and then migrate to a rolling planning process.

Why Annual Planning / Budgeting Is Not Advisable

The 10 reasons why the annual planning process should be replaced are because it:

1. Takes too long, costs too much – too much detail and too many iterations.
2. Does not help run the business as it is out of date as soon as the ink has dried
3. Leads to dysfunctional behaviour, building silos and gaming the system
4. Undermines monthly reporting (monthly budgets are poor targets)
5. Is an anti-lean process
6. Often has allocations that budget holders have no control over
7. Decisions made too early and often too high up
8. Prevents value adding activities that were not in the budget
9. A bad yardstick for evaluating performance
10. Based on planning and central control which has MacGregor’s theory X as its base – that you cannot trust people

Smart organizations do not have an annual planning process anymore. Instead, they use quarterly rolling planning.

Jeremy Hope- thought leader with rolling planning

Jeremy Hope was the world’s foremost thought leader on corporate accounting issues, he sadly passed away a few years ago. Hope had an uncanny ability to always be at least five years ahead of what better corporate accounting practices should be. Hope has stated that not only is the budget process a time consuming, costly exercise generating little value, but it also, and more important, is a major limiting factor on how your organization can perform.

Here are some of his quotes that challenge the very concept of budgeting.

“So long as the budget dominates business planning a self – motivated workforce is a fantasy, however many cutting – edge techniques a company embraces.”

“The same companies that vow to respond quickly to market shifts cling to budgeting — a process that slows the response to market developments until it is too late.”

“It’s no secret that annual budgeting processes are time consuming, add little value, and prevent managers from responding quickly to changes in today’s business environment.”

Hope and Fraser in their beyond budgeting book[i], pointed out that the annual budgeting process was doomed to fail. If you set an annual target during the planning process, typically 15 or so months before the last month of that year, you will never know if it was appropriate, given that the conditions of that year will never be guessed correctly.

Sadly Jeremy Hope passed away but his movement is very active,  I would recommend you view Bjarte Bogsnes’ presentation  on ‘Beyond Budgeting – business agility in practice’ www.youtube.com/watch?v=boXYC5HR2DI

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[i] Jeremy Hope and Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap Harvard Business Press, 2003