Budget – a simple tool blown out of proportions

August 20, 2014

Read time 2 min

First, let’s distinguish between two different things, budgets and budgeting. In simplest terms, a budget is a financial plan with estimates of revenue and costs. Budgeting is the process of creating a budget. In big corporations, the budgeting process means accumulating budgets across multiple departments and compiling them into a final overall budget.

Budgets, when used properly, are a great tool for making decisions. You can fiddle with some numbers and gain a better understanding of different options before going through with them. It’s quick and effective. The numbers are not going to be exact, but they can give you a rough idea, which is often enough.

Unfortunately, budgets are often blown out of proportion with budgeting and performance management practices. When budgets are used to manage people it all goes horribly wrong. As explained in my previous blog post, budgeting is a wasteful and destructive relic from the past.

Budgets have their weaknesses too. Produced value is often intangible and thus hard to capture in a budget. The events we run (Hello World Open, Reaktor Dev Day, Reaktor Design Day) are a prime example. No one in their right mind would ever run them if they were evaluated only based on the budget. Their value is very hard to quantify, and for the most part we have to go with a gut feel.

Budgets can convey a false sense of certainty. Exact numbers in a spreadsheet make you forget that the world around us is unpredictable. Things happen. Things you should’ve prepared for, but didn’t. Things you couldn’t have prepared for. Budgets make it look like surprises are rare, when in fact, they’re constant.

Budgets are short-term. They focus on a timeframe most often not longer than a year. Having longer timeframes wouldn’t make sense because of the inherent unpredictability. Yet, we should constantly be working towards a long-term vision. Budgets tend to hinder that long-term vision in favor of our budgeting timeframe.

A budget is a simple tool. Don’t blow it out of proportions.

Here’s a list of things to keep in mind when working with budgets.

  • Keep your eyes on the long-term big picture regardless of budgeting timeframe
  • Focus more on maximizing value than minimizing cost.
  • Use budgets for what they a good for: a rough estimate of income and costs.
  • The world is unpredictable and having a budget is not going to change that.
  • A reasonable amount of detail is enough. Don’t spend time (or worse, make others spend time) delving into details that are unpredictable anyway.
  • Do not set targets or attach bonuses to budgets.

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