Budgeting as a Stifling Ritual

I don't often meditate on accounting. That's not to say it's unimportant - ultimately, profit and loss is what drives a commercial enterprise - merely that it's entirely uninteresting and seldom the source of much innovation in a business. It's a backward-facing practice that assesses the financial impact of what has already been done, and which only looks up from the ledger once a year to consider what might be done in future.

And that's precisely what's got me to thinking: bean-counters have a great deal of control over a firm's activities by virtue of having control over the resources necessary to do anything. Even when you set aside the potential problems (which are many) that arise when the bean-counters overstep the bounds of their authority (which even when seldom is too often), there is an inherent problem with the infrequency with which financial decisions are made by a firm.

The core of the matter comes from budgeting schedules: the fact that, in many organizations, budget is allocated only once a year (there is an annual budgeting cycle) enables better control of financial resources, but prevents firms from being innovative by preventing ideas from coming to fruition in a timely manner. In effect, the budgeting process is one of the major factors (if not the most significant among them) that firms become stodgy, slow, and unable to outmaneuver the competition.

In plainer terms, budgeting puts good ideas on a shelf, for no other reason than to make life easier on the individuals who prepare the budget. If someone has a great idea in February that will generate $1 million per month for the firm, it has to wait until October to be considered, and the following January (at least) to be implemented. Which means the company forfeits $10,000,000 for not having implemented the idea sooner.

Why? Because October is the time when we do planning and budgeting for the next fiscal year. Why? Because we do. I can conceive of no other reason.

Perhaps it's a throwback to the time of ink and paper, where gathering up information about a firm's financial status and ongoing operations required months of effort and was terribly expensive, such that it made sense to do it only once a year.

Given computerized accounting systems, which make information available almost instantaneously, that excuse is no longer valid. A firm of any size should be able, within a very short amount of time, to assess its operations and make decisions. The present fashion of "dashboards" that provide a real-time view of data should facilitate this - though my sense is that most companies see dashboards at a fad and do not use the information to drive decision-making, but instead, give them an occasional glance. (Which could just be an effect of the metaphor - a dashboard speedometer doesn't tell you which way to steer.)