In the cycle “Budgeting challenges in a large company” we face another topic related to with closing and looping in the budgeting process, and the resulting phenomenon of budgetosis. Many processes in the company are repetitive, cyclical processes, and having such experience, we approach budgeting methods in the same way. However, it is worth looking at the budgeting process from the sidelines and analyzing whether the way we budgeted last year will also work this year and whether any important changes in the organization areaffecting the budgeting process.
Loop in the budgeting process
The budget often perpetuates the way an organization works and reflects the same mistakes repeated year after year. Most often it looks like this, based on the already existing MPK, the implementation of the budget is estimated and it is calculated unilaterally. Every year it looks exactly the same, nothing changes and we approach budget planning in the same way as before. We compare the plan vs. the budget, we assume increases (usually determined by the president or the board on the basis of assumptions or unverified information – the industry has increased by +5%, +10%, so let’s implement the budget with such increases). The sales, purchase and procurement departments try to implement the budget plan prepared in this way, but often it is an insufficient approach and a very shallow budgeting model. The budget repeated the same mistakes that the organization had made before.
What is a budget?
Part of the process of this looping in budgeting is the phenomenon of budgeting. Budgeting is one of the elements of this type of planning and most often occurs when plans are not matched to what is happening outside the organization, but are created on the basis of randomly imposed values, evenly distributed throughout the organization.
Budgeting is excessive caution and excessive propensity to save, which may appear in the budgeting process in organizations. The phenomenon of budgeting may lead to setting too low forecasts for expenses or revenues, which may negatively affect the effectiveness of the organization’s operations. When managers responsible for budgeting are too careful (because they have a 5% increase in the plan to implement, and they could easily implement 15%), they may limit investments and employment in their departments. As a further consequence, such action has a negative impact on the development of the company.
The phenomenon of budgeting may result from fears of the impossibility of meeting budget plans, the risk of losing a job or pressure related to achieving financial goals. It can also result from a lack of trust between different departments of the organization, which may lead managers to make more conservative forecasts.
How to deal with budgetosis?
In order to minimize the phenomenon of budgeting, it is necessary to include realistic forecasts in the budgeting process and carefully analyze potential risks. It is also important to ensure proper communication between departments in the organization, which we wrote about in the first episode of our series, and to ensure trust between various departments of the organization and to motivate managers to achieve ambitious financial goals.
It is worth looking at the planning and budgeting process in the company in a critical way, supported by many market premises and professional research on various product categories. Above all, however, it is worth testing various possibilities in terms of budgeting models and looking for the most appropriate one for our organization.
You can find more about the planning and budgeting process on our website.