Why Business Budgets Fail

The budget situation:

Managers develop unrealistic budgets. Does this sound familiar? The year is not half over and the manager is already trying to figure out why and how he/she is already over budget.

The result:

Over spending, poor results, less than desirable bottom line.

The budget solution:

Managers must do a better job of developing and managing budgets.

Here are the primary reasons managers miss their budgets:

Managers don’t know how to budget: For the most, managers are not taught how to budget. Budgeting is one of the least-liked management tasks so budgets do not get a lot of attention.
Managers do not understand the financial aspects of their businesses: Few managers take the time to review and understand the financial dynamics of their organization.
Managers fail to get the right information: Because most managers hate to budget, they often do not make the effort to gather the information needed to develop an effective and achievable budget.
Managers adjust budgets without redefining expectations: Often, especially in today’s economy, after the first draft is submitted, top management asks for reductions in expenses to get the overall budget in line. “Tweaking” is normal. However, when managers cut expenses without redefining expectations related to what services or deliverables have to be cut to achieve the new plan, the budget is doomed for failure.
Managers submit “overly precise” budgets: This occurs when the manager spends hours gathering the details for all the projects, goes through exact calculations for salaries, increases, and benefits for his staff, details every new project planned for the new year, and submits a budget that is perfect. Managers need to remember that the budget is a forecast. Perfect budgets are rarely achieved. Without budget training, managers often are too exacting or too “loose” in creating the budget. Managers need to balance the science and the art of budgeting.
Managers only use historical data: Historical information on sales and costs is important, but past years is not your only guide. You must also consider your future plans and what your competitive environment and economic environment is apt to look like.
Managers fail to administer the budget effectively: As business needs and economic realities change, budgets must be adjusted. Managers know how to make good budget decisions and communicate with senior management on the impact of altered plans on bottom line results.
Managers fail to understand finances: Too often, managers have never received training on business finance. Failure to understand basic business finance can make it impossible to put together a realistic budget – much less administer it.

There are a number of reasons why managers often fail to hit their budgets, but it does not have to be that way. Developing and managing can be easier than you think. But without budget training for managers, developing budgets that are both aggressive and achievable will be difficult.

By: Dale Mask

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