Budgeting "noise" arises from poor or conflicting information that makes sound analysis and decision-making difficult.
Summary: Budget noise is created by incomplete, inaccurate or untimely information, making clear and objective budget decisions more difficult. Good processes and standardized methodologies can help alleviate some of the noise. More...
Summary: Conflicting needs and priorities across the organization make it difficult to validate information and make good decisions. More...
Summary: Noise is inherent to the process. This fact must be accepted and managed. More...
An old budget adage: “It’s an average budget year. It’s worse than last year, but better than next year.” A few reasons for this despairing outlook among many associated with budgeting processes include a chaotic and unpredictable budget formulation process; unrealistic and ever-increasing demands placed on budget officers and analysts; and the fact that budget decisions are taken personally across organizations. Because of all of these factors, it can be difficult for those charged with developing budgets to filter salient nuggets from the tidal wave of information supporting budget justifications, which is provided from all quarters.
Many times budget information is incomplete, inaccurate, or untimely. This ‘noise’ around budget justifications can lead to poor budget decisions relative to an organization’s strategy, highest priorities, and available pool of budget resources. Budget officers, who in good faith attempt to be objective, fair, and to keep the organization’s best interests in mind, are ever increasingly finding it difficult to filter out this noise.
The result of working in an environment where budget information is sometimes unreliable or not particularly useful to decision-makers can lead to insensitivity to all relevant budget information. Analysts and their supervisors may begin to ignore the information they are given in support of budget requests, or learn to only trust information from a particular source, thereby resulting in an unnecessarily narrow view of the overall budget picture. Another example might be that conflicting information about the best course of action for a particular program may cause budget analysts to default to maintaining the steady state of funding when a change may be in order.
The challenge, then, is to develop sound, standardized budget processes that require consistent approaches for justifying budget requests; greater reliance on performance information in support of requests; and an enhanced ability to link requests to the organization’s overall strategy or mission. While taking measures such as these will never serve to completely eliminate noise in a budgeting environment, these steps can serve to buffer budget decision-makers from the onslaught of unreliable information that can make their jobs so challenging.
Creating the budget would be a much simpler process if it were not for the constant list of needs and wants that must be waded through. It seems everyone has their own list of goals and objectives they want put in the budget above all others. While these specialized lists of demands may be important to the individual business offices in an organization, the planning and budgeting process must employ a process to sift, weigh, and evaulate the multitude of proposals.
Pressure to determine the legitimacy of planning and budgeting demands is also an issue. Ambiguity can arise from multiple conflicting stakeholders and the lack of direct control over resources. To develop an understanding of the relationship between commitment, legitimacy, and planning it is important to analyze the sources, have needs clearly articulated by those desiring the changes/needs, and commit to a set of diverse yet focused set of needs. This process will help organizations with ambiguous requests recognize the key needs of their stakeholders.
An inherent aspect of Planning and Budgeting is an assessment of the future. This is difficult and is further compounded by interactions with many different and significant management systems. There cannot be any absolute certainty in a future plan despite our desire for it to be precise. The only guarantee is that a precise plan or budget will be precisely inaccurate. Information needed to complete and plan or budget is, in this way, always going to be incomplete. The process must then be robust enough to allow for missing or incomplete data. Further, participants in the process must temper their expectations for perfect information and must accept a degree of fuzziness in the process and its results.
The Planning and Budgeting process will oscillate as assumptions are made, patterns recognized, results forecasted, and information is shared. Necessarily, assumptions will be tested and adjusted. As assumptions are adjusted, the most pain is at process or organizational interfaces when dependent assumptions must then be adjusted. For example, initially, customers may forecast their demand for services. Then, when they learn the potential unit cost and total cost, they may then adjust their initial forecast. This then causes a recalculation of unit and total cost again. And the oscillation goes on until a balance or acceptable range is discovered.
Noise is a significant risk to the planning and budgeting process if it causes participants to be distracted or to lose confidence in the process. At times, noise can be beneficial if it causes management to more carefully evaulate a decision or strategy. Planning and Budgeting process owners must design the process to allow for noise and educate participants about the role of noise and how to adapt to it. (ajs)
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- Recognize that noise will exist. Develop sound, standardized budget processes with consistent approaches for justifying budget requests; greater reliance on performance information in support of requests; and an enhanced ability to prioritize requests according to their contribution to the organization’s overall strategy or mission.