Alternative Budgeting

Companies are still looking for better ways to set performance targets.


You don’t need a survey to tell you that finance executives hate budgeting. What the numbers do show is just how much: respondents to recent polls by CFO Research Services say conventional budgeting is contentious and political (45 percent), yields unrealistic numbers (72 percent), and makes managers behave badly (53 percent).

So more CFOs are looking for alternative methods to the usual last-year-plus-a-percentage drill. New numbers from the American Productivity & Quality Center show that many companies are now using a blend of other approaches, including rolling forecasts, activity-based budgeting (allocating money to products and services rather than traditional cost items), and demand pull (linking budgeted costs to the sales forecast).

Of course, changing the method won’t solve all budgeting problems. Companies need to alter the process more fundamentally, argues John McMahan of the Hackett Group. Budgeting should focus on the few measures that really show if a strategy is succeeding, he says, rather than the 200-plus line items that clog the typical budget. Companies should set their targets relative to competitor performance rather than last year’s results. And managers should get paid based on how well they hit those targets.

Such changes yield benefits, according to McMahan’s research, including more-accurate forecasts and higher employee satisfaction. Managers don’t want a process that is merely the start of bonus negotiations. “The idea is to beat the competition,” says McMahan, “not the budget.”

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