Battle of the Budgets

Budgets have a purpose, but it's not the traditional purpose, nor how they're typically used (misused).

Budgets usually define what a business unit or department can spend, based often on how they plan to spend it. During the year, business conditions change and plans get modified, but the budgets do not. Thus, towards the end of the year, you have a department that's restricted in what it can do because it's already spent its budgeted amount. Alternatively, you'll have a department that hasn't needed it's full complement of financial resources. Fearing future budget cuts, particularly during the time that the next year's budgets are being proposed, this under-spent department will spend money (frivolously?) to prove that they need all of the money. They didn't really need the equipment, training or whatever, but they might need some other equipment or training next year, so the money is spent on whatever makes "some" sense. They can then ask for similar dollars in the new budget.

Meanwhile, the area that might be of strategic importance or a growing market is limited in how it can set up the company for positive results going into the new year. It's not allowed to spend any more, and has to wait till the next year. Momentum is lost, a market opportunity may close and the results won't show up till mid-year anyway (see a previous post).

Budgets are good for forecasting cash flow requirements. After that initial purpose, any budget should be a "living document" subject to change as competitors take action, regulations come into force, new technologies are created, economic cycles change demand or supply conditions, and a myriad of other potential factors appear or disappear. As fluid as your goals and project plans need to be, so should the budgets.

Don't let it turn into one department or business unit waging turf war over the field of available finances.