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Due to shelf life affects, the budget often does not reflect the real business environment. Budgets become less relevant where they do not keep up with the pace of the business. As budgeting serves many purposes at many levels of detail, traceability becomes a challenge.
Summary: Because the budget serves multiple purposes, and thus has multiple users, relevance must be addressed for each purpose. To be relevant (and fair), the targets must reflect what the unit/individual can control and be traceable for performance management. In addition, budgets become less relevant as time goes on, thereby attaining a shelf life. More...
Summary: Planning and Budgeting have both a leading and a lagging role. The leading role is to provide the means to chart a course forward and to translate strategy into day-to-day operations and choices. The lagging role is one of performance measurement. In budgeting, when the detail takes on meaning beyond its real use, then it loses relevance. The budget's shelf life is determined by how fast the business environment is changing, how radically the environment is changing, and by particular events specifc to the organization. More...
Summary: A budget can not be relevant to all people at all times, but it certainly can be relevant to some people some of the time, and it is up to the users to recognize those times and not completely discount a budget because of changing conditions or the mere passage of time. More...
A significant complaint about the budgeting process and the final budget is that it is often not relevant to day-to-day business operations. However, because the budget serves multiple purposes, and thus has multiple users, relevance must be addressed for each purpose. For example, in setting financial and performance targets, the performance targets/criteria should be traceable to a unit or individual. To be relevant (and fair), the targets must reflect what the unit/individual can control. Also, significant changes in the business environment can render the original targets out of date and thus not relevant.
This second point raises a broader issue about the “shelf life” of a budget. Budgets become less relevant as time goes on – reasons include changes in the environment (market environment, demand/supply for labor and materials) and limitations on information when projections/estimates are originally determined. Also, to the extent that the budget does not have the traceability previously mentioned, the budget is not relevant for performance measurement as it is being executed.
Planning and Budgeting are essential business processes. However, when these processes begin to take on lives of their own, they also begin to lose relevance. Planning and Budgeting have both a leading and a lagging role. The leading role is to provide the means to chart a course forward and a means to translate strategy into day-to-day operations and choices. Discarding this role is to say that operations need no direction. This is patently false – rather the opposite – all operations require direction.
The lagging role is one of performance measurement. How well did we do? More importantly, How can we do better next period? Plans and budgets formalized during the leading phase provide benchmarks for comparison of “what we thought would happen” versus “what actually happened.”
Relevance is also important in other dimensions such as the amount of detail; performance measures, and time horizon. For some organizations, the greatest relevance lays in the thought process and decisions made during the Planning & Budgeting process.
Often more details are required to prepare a plan or budget than are required in the final product. If the detail takes on meaning beyond its real use, then it loses relevance. A preparer often needs more detail than a reviewer or upper level manager. Excessive detail provided to an upper level manager, serve to obscure issues, delay decisions, increase iterations, and/or exacerbate micro-management tendencies.
Performance measures are an important part of business operations. While it is important to evaluate the difference between what was planned versus what happened, basing compensation on adherence to budgets is detrimental to the P&B process and to regular operations. On the front end, compensation links drive additional iterations, gaming, and negotiations into the P&B process. On the back end, compensation links drive inflexibility and gaming.
Plans & Budgets have a shelf life. Their shelf life is determined by how fast the business environment is changing, how radically the environment is changing, and by particular events(See Events). Often it is assumed that a budget must cover one year. This assumption is not valid. Plans and Budgets lose relevance more than linearly with the passage of time. Each organization must take care that its P&B time horizon is appropriate to its operations.
Ultimately management must drive Planning & Budgeting relevance appropriate to its particular operations in consideration of these factors. The process is not the master – management is master of the process.
Determining the relevance of budget data is a tricky issue. Everyone in the organization is impacted by the implementation of the plans that form the foundation of a budget; so, in effect; the budget is relevant to everyone throughout the organization. At the same time, however, a person not directly involved in the preparation of a budget may feel the budget data is irrelevant to their day-to-day responsibilities. The bottom line is that relevance can only be determined within a given context, so we must give context to any discussion of relevance.
Consider when the role of the budget is to provide guidance on a path to long-term goals. Since a budget is created under existing “as-is” conditions then the budget will maintain relevant while the goals do not change. Yes, it is true that conditions may change before the term covered by the budget ends, but that does not mean the general guidance provided by the budget becomes irrelevant. It is like planning the stages of a long trip. The goal may be an around the world trip and the budget for the current year could relate to resources to be used to get across North America. You may have budgeted to fly, but the airline you booked for your flight goes bankrupt. The conditions have changed, but that does not mean that the budget becomes irrelevant. You might divert resources to rent a car and drive. You also might consider booking a first class flight on another airline. The budget will still provide guidance on which of those options to select.
A budget can not be relevant to all people at all times, but it certainly can be relevant to some people some of the time, and it is up to the users to recognize those times and not completely discount a budget because of changing conditions or the mere passage of time.
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(1) Does not reflect real business environment (2) Lack of Relevance during execution (3) Relevance matters (4) Budgets become less relevant (5) Budgets do not keep up with the pace of the business (6) Budgeting serves many purposes at many levels of detail (7) Can know what is relevant to all users (8) Budgets have a shelf life (9) Doesn't match the objectives to which I'm held accountable (10) Current environment not consistent with original strategy (11) Traceability is relevant and important