Annual Budgeting – Our favorite season?


Yes, it’s that time of the year. The time that is often filled with pain and fear. No, I am not talking about Halloween but about the corporate budgeting process. Much has been written about the annual budget. And most of the written stuff is not positive. Jack Welch alone has provided us with a few memorable quotes such as:

“The budget is the bane of corporate America. It never should have existed.”

“But the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization. (…) And yet (….) companies sink countless hours into writing budgets. What a waste!”


In theory, a budget should actually be a rewarding and important process. Why? Let’s look at the purpose of a budget: It should outline how we want the future to look. It details planned actions, outlines investment areas etc.. When you think about it, these are very important tasks. And it should not be that nerve racking. Budgeting and planning allow us to sit back, look at our past achievements and provide us with the opportunity to lay out a path towards future success. Doesn’t sound too bad, right?


Indeed, the annual budgeting process is anything but popular. No wonder. It is usually very difficult and the resulting value is dubious. So, what’s wrong? Many things. Here are a few statistics that I pulled together from various articles, books and conferences. Depending on the specific sources, number tend to vary a bit here and there. But the general trend is the same.

  • Over 70% of all budgets loose their validity after the first quarter of the new fiscal year. The speed and volatility of our global connected world renders many assumptions useless.
  • And estimated 94% of all executives do not have confidence in the budget numbers. They believe the numbers are either outdated, they are padded or they are meaningless. Huh?
  • 75% of all companies need more than three months to complete the entire cycle. Even three months is a long time these days. Responding to changing market conditions becomes very difficult with these long cycle times. Also, think about the enormous amount of resources that are invested into the process. Do we really want to spend all that time only to find that the output doesn’t actually reflect reality?
  • Over 75% of all budgets are believed to be sandbagged. Gaming the numbers remains a popular competition: cost center managers exaggerate expenses to protect their turf. Sales managers express negative market views to maximize their earning potential. Not good.


It’s time for a change! In the next few weeks I will share a few ideas for making the budgeting process more valuable. On Thursday, business advisor Mike Duncan will discuss the overall purpose of the budget. He recently wrote a nice article called Six Ideas for Setting Successful Budgets.

If you have stories and best practices to share, please get in touch with me.


4 responses to “Annual Budgeting – Our favorite season?”

  1. Niels Pflaeging

    Christian, there are a couple of logical flaws in this post. Example: “Let’s look at the purpose of a budget: It should outline how we want the future to look.” That is simply not true. A budget in almost all companies obviously does NOT serve that purpose: Otherwise you wouldn´t intensely negotiate budget figures, right? Most executives have another process for defining what the future SHOULD look like – and that´s Strategic Planning. THAT process usually doesn´t fulfil the promise either, but that´s another matter.
    The PURPOSE of budgeting is another, completely different one. James O McKinsey, in his book on bugeting from the 1910s, articulated that purpose perfectly, in saying that it is to COORDINATE functions and departments in a corporate pyramid, and to allow for control. That´s it. Now, organizations should ask themselves: Do we really want that? Can it be effective?
    I pity that guy Mike Duncan. His “ideas” (more likely to be: delusions) are about 50 to 100 years late to the game…

  2. Anonymous

    Niels – Thanks for your comments. We all have different opinions about this subject and I can tell in your tone that your are more than just passionate about this.
    Every company has a different view of that. Most organizations are reluctant to give up the budgeting process (some companies are actually not able to do that because of legislation). Sure, many organizations use the budget as a control mechanism. Although, more and more CFOs I work with try to turn the budget into an opportunity to put thought into the next fiscal year.
    It’s ok to disagree about this, Niels. But I do not think it is helpful to call people “delusional” etc..

    1. Niels Pflaeging

      Hi Christoph. Well, I wonder: How do you call opinion that is not based at all, or actually contrary all scientific facts, all experience with regards to complexity and non-linearity, and also contrary to manageraial experience. How do you call behavior that is not open to learning, in spite of scientifc and anectodal evidence? Because that is what we can observe with regards to performance management, corporate planning, or budgeting, in general. It is as if reason has not yet entered the sphere of performance management. But if you call my criticism, and my outrage abouth this myth-chasing that has been going on for nearly 100 years “unhelpful”, well then, my firend, then you are right: Maybe I cannot help here. Maybe you just have to keep chasin´. And one day, maybe too late, recognize your own ridicule.

  3. Like the post @cpapenfuss. Sound ideas from which to learn. Thanks for your efforts getting this information out. Will look over Mike Duncan’s post now!