Is Budgeting Your Business Worth the Cost?

As you’ve undoubtedly heard, there’s no such thing as a free lunch. Budgeting has its costs, which business managers should take into account before rushing into (or continuing with) a full-scale budgeting process. Whether to engage in budgeting is a prime example of how managers make tough decisions: Comparing costs versus benefits.

Budgeting has many benefits, but managers have to weigh these against the costs of budgeting. And by costs, this doesn’t mean just the monetary out-of-pocket costs. The costs of budgeting are in several dimensions.

Budgeting is not without several serious problems on the practical level. Budgeting looks good in theory, but in actual practice things aren’t so rosy. Here are some concerns to consider:

• Budgeting takes time, and the one thing all business managers will tell you is that they never have enough time for all the things they should do. The question always is “What else could managers do with their time if budgeting were eliminated or scaled down?”
• Budgeting done from the top down (from headquarters down to the lower levels of managers) can stifle innovation and discourage managers from taking the initiative when they should.
• Unrealistic budget goals can demotivate managers rather than motivate them.
• Managers may game the budget, which means they play the budget as a game in which they worry first and foremost about how they’ll be affected by the budget rather than what’s best for the business.
• There have been cases in which managers resorted to accounting fraud to make their budget numbers.

There has always been grumbling about budgeting. A well-known adage in the advertising profession is that half of a company’s advertising cost is wasted; the problem is that managers don’t know which half. Likewise, you could argue that half the cost of budgeting is wasted, although it’s difficult to pinpoint which particular aspects of budgeting aren’t cost effective.

A recent article makes a strongly worded case against budgeting. See “Freed from the Budget,” by Russ Banham, which was posted on the CFO.com website and taken from the September 1, 2012 issue of CFO magazine. This article offers several reasons for not budgeting, including the following:

• Budgeting prevents rapid response to unpredictable events.
• Budgeting stifles initiative and innovation.
• Budgeting protects costs that aren’t value-adding.
• Budgeting demotivates people.

The article makes a good case against budgeting, but it doesn’t provide a very convincing answer to the question “If not budgeting, then what?” Quite clearly, business managers must plan and control. The trick is how to carry out these tasks in the most effective and efficient manner.