Don`t hold managers responsible for budget over-runs

Johannesburg, 28 Feb 2005
Read time 3min 50sec

Accountability is critical in the planning and outcome of a company`s results. Cost centre managers, however, cannot be held accountable for exceeding a budget they played no active role in preparing.

A budget, once signed off by the person or people responsible, is the best indicator of expected performance, often shaping the short- and long-term financial future of the company. But if cost centre managers have not been involved in planning and putting together the budget, says Kevin Phillips, MD of budgeting and product development specialist idu Software, they should not have to take ownership of that budget.

"To expect managers to be accountable for inherited numbers imposed on them by head office is unrealistic, and is setting them up for failure. This is primarily the reason for management`s reluctance to accept accountability for financial numbers in general, let alone at budget time," says Phillips.

Input from cost centre managers is a vital link to drawing up a budget that realistically reflects figures from each division. The problem, however, is time. Traditionally the budget process in large organisations can take anything from two to four months to complete, gathering figures and forecasts from various divisions and branches, aggregating the results and requiring sign-off at various levels.

The load that this process puts on all levels of management is considerable, making the process onerous and time-consuming. As a result, many organisations opt for an autocratic approach, with budgets planned and set at head office-level, and simply imposed on the respective divisions and departments.

"This may reduce the arduous and time-consuming burden of having to gather data from all the relevant divisions in large organisations, but in the long run this is merely a superficial solution. Without line management`s involvement, there cannot be buy-in. Without buy-in, there will be less commitment and ultimately, less motivation from cost centre managers," says Phillips.

Even where the company has adopted and welcomed the principle that end-user involvement is vital, often at the final reckoning, head office will override individual inputs and enforce high-level changes to the overall budget to achieve the objectives desired by the executive.

This, believes Phillips, overrides individual input and needs to be filtered down to individual budgets, creating the obvious question for the end-user: why did I bother?

Involving divisional managers in the budgeting process encourages a degree of ownership - committing to forecast figures not only ensures a high level of participation but plays an important role in goal-setting. If done properly, this can achieve high levels of goal congruence from individual manager level, right through to company and group objectives.

The converse of this approach is when figures are set by head office based on the executive desired view of the future. This can often, however, be out of touch and possibly unrealistic at the "coal face". The effect of a top-down budget is de-motivational and often doomed to failure before the year to which it relates even begins.

Budgets are often used for management`s control of performance, to maximise productivity and ensure steady work levels throughout the year. Bonuses are determined by performance and, for cost centre managers, on bottom line delivery. How, asks Phillips, can companies make someone`s bonus a factor of a budget they`ve had no input into at all? If the numbers are unrealistic and unattainable, bonuses become out of reach and motivation drops.

"By setting a centralised budget, organisations create an environment that is almost guaranteed to fail," says Phillips.

The budget process need not be such a cumbersome, onerous burden. Budgeting is not about the concept so much as the process and using the right tools to ease the process. Good budgeting software streamlines the process. Online data capture and transparency of data is critical to line managers involved in the budgeting process, making the process far more efficient.

"Working on budgets for four months of the year is not what cost centre managers are paid to do and certainly not what their annual bonuses are driven by. A reliable, user-friendly budgeting tool makes the process quick and easy, and will not impact productivity," says Phillips.

Editorial contacts
FHC Linda Doke (021) 790 5287
IDU Software Kevin Phillips (021) 712 4980
Login with