The budget, said to derive from the old French word bougette, is a mainstay in every finance professional’s calendar. Businesses started planning 12 months of spend in a single, once-a-year-report long before the Chancellor of the Exchequer, Peter Gladstone, commissioned the very first red budget box in the 1860s. It is a fit-for-purpose approach that has served companies to a point, but has the time now come to change the methods behind this annual report?
Every year, department heads become worried that if funds are not spent before the next budget is drafted, they may find their pot is reduced in the following period. Referred to as the ‘use it or lose it’ mentality, many companies rush through purchasing decisions when they realise the end of the year is approaching or worse still, invest in products or services that are outside their usual area of spend.
Earlier this year the National Audit Office admitted that the Department for International Development’s (DfID) outlay on foreign aid was not spent effectively. Civil servants are said to have invested £1 billion in just eight weeks to meet the government’s target for foreign aid.
March madness is another name for what occurred at the DfID. Professionals with financial responsibility enter a period of increased spending, often to the detriment of business strategy. Research into procurement by Jeffrey B. Liebman and Neale Mahoney found that last-minute spending was typically of lower quality when projects were rushed towards the back end of the financial year.
A reduction in strategic decision making is not the annual budget’s only disadvantage. By predicting revenues 12 months in advance, there is a chance that periods of intense growth for a business can be hindered. Innovative thought can struggle in an environment where exceptional ideas are delayed or not presented to upper-level management in case they are outside of a budget’s parameters.
The annual budget does have its benefits and should remain, however it should not be the only way to measure the effects of company strategy. Using reporting solutions to adjust financial targets and reviewing a financial plan regularly throughout the year creates a more reliable way of assessing the health of the company.
By keeping a close eye on macro-economic industry issues and market share, flexible reporting and rolling forecasts can also be hugely beneficial alongside the re-defined role of the annual budget.