What are the most common challenges of using operating budgets to improve performance?

Operating budgets are essential tools for planning and controlling the financial activities of an organization. They help managers align the resources and goals of different departments, monitor the progress and performance of various projects, and evaluate the efficiency and effectiveness of operations. However, using operating budgets to improve performance also poses some common challenges that need to be addressed. In this article, we will discuss some of these challenges and how to overcome them.

1 Accuracy and reliability

One of the main challenges of using operating budgets to improve performance is ensuring that the budget data is accurate and reliable. Budgets are based on assumptions and estimates that may not reflect the actual conditions and outcomes of the business environment. For example, unexpected changes in customer demand, market competition, supplier costs, regulatory requirements, or internal factors can affect the budgeted revenues and expenses. To overcome this challenge, managers need to use realistic and updated information, apply appropriate methods and tools for budgeting, and conduct regular reviews and revisions of the budget.

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Mohamed Moustafa Saber, MBA

CFA Level 1 @AUC | Sr. FP&A @Midar | MBA in Finance & Investment | +14 Years in Financial Accounting & Reporting | Oracle Fusion Key User
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1- Rigidity: Inflexible budgets hinder adaptability. 2- Short-termism: Can neglect long-term goals. 3- Forecast Errors: Mistakes lead to unrealistic expectations. 4- Misallocation: Can overlook high-potential areas. 5- Demotivation: Stringent targets demoralize teams. 6- Bureaucracy: Prolonged approval processes delay actions. 7- Sandbagging: Understating forecasts to ease targets. 8- Cost Obsession: Excessive cuts harm growth. 9- Static Data: Rapid changes can render budgets obsolete. 10- Silos: Lack of holistic, collaborative planning.

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Faheem Kallingal

Senior Internal Auditor | Financial Risk Management | UAE Taxation
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performance-based budgeting links budget allocations to specific performance goals helping to ensure resources are allocated to the areas that will have the biggest impact on performance.

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2 Participation and communication

Another challenge of using operating budgets to improve performance is fostering the participation and communication of the relevant stakeholders. Budgets are not only financial documents, but also strategic and operational plans that involve the input and feedback of different managers, employees, customers, and suppliers. However, sometimes there may be a lack of participation and communication among these parties, leading to conflicts, misunderstandings, or resistance. To overcome this challenge, managers need to encourage the involvement and collaboration of the stakeholders, communicate the budget objectives and expectations clearly, and address any issues or concerns promptly.

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Faheem Kallingal

Senior Internal Auditor | Financial Risk Management | UAE Taxation
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Managers should be open and transparent about the budget and should be willing to share information and answer questions from stakeholders.

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3 Flexibility and adaptability

A third challenge of using operating budgets to improve performance is maintaining the flexibility and adaptability of the budget process. Budgets are not fixed or static, but dynamic and responsive to the changing needs and circumstances of the organization. However, sometimes managers may be too rigid or conservative in following the budget, ignoring the opportunities or threats that arise in the market or the organization. To overcome this challenge, managers need to adopt a flexible and adaptable approach to budgeting, allowing for adjustments and modifications as needed, and using contingency plans and scenarios to cope with uncertainty and risk.

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Lisa Martin CPA

PTBA - Professional Tax and Business Advisor Accountant
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Flexibility and adaptability are key when it comes to operating budgets. They need to be able to roll with the punches of changes in the internal and external business environment. But when structures and processes are too rigid, it becomes hard to react quickly to unexpected twists or shifts in the market. Again measure variance analysis weekly with your real time accounting software, and flex into trends, asking the who what where and why questions with the numbers - keep the data relevant actuals and budgets!

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4 Alignment and integration

A fourth challenge of using operating budgets to improve performance is ensuring the alignment and integration of the budget with the other aspects of the organization. Budgets are not isolated or independent, but linked and coordinated with the vision, mission, goals, strategies, policies, procedures, systems, and culture of the organization. However, sometimes there may be a misalignment or disconnect between the budget and these elements, resulting in confusion, inconsistency, or inefficiency. To overcome this challenge, managers need to align and integrate the budget with the organizational context, ensuring that the budget supports and reflects the values, priorities, and capabilities of the organization.

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5 Evaluation and feedback

A fifth challenge of using operating budgets to improve performance is conducting effective evaluation and feedback of the budget results. Budgets are not only plans, but also benchmarks and standards that measure and compare the actual performance of the organization against the expected performance. However, sometimes the evaluation and feedback of the budget may be inadequate or inaccurate, leading to missed opportunities, errors, or biases. To overcome this challenge, managers need to use appropriate and reliable methods and tools for evaluation and feedback, such as variance analysis, ratio analysis, or balanced scorecard, and use the results to identify and implement corrective actions, improvements, or best practices.

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Lisa Martin CPA

PTBA - Professional Tax and Business Advisor Accountant
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Setting up systems within your accounting software for continuous evaluation and feedback is crucial to gauge how well the budgeting process is working and pinpoint areas needing improvement. Without strong evaluation frameworks and feedback channels, refining budgeting practices and boosting performance becomes tough, but with a framework, actual vs budget, green is good, red is bad you can use these real time insights to drive change and results! Training, collaboration, keep it simple, have yardsticks (KPIs) you can manage what you measure!

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Faheem Kallingal

Senior Internal Auditor | Financial Risk Management | UAE Taxation
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Operating budgets should be used to empower managers and employees. They should be given the authority to make decisions and take actions to improve performance within the constraints of the budget.

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Lisa Martin CPA

PTBA - Professional Tax and Business Advisor Accountant
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Make a budget F U N (so clients do and use them!) spice up the preamble with clients like ... Struggling with operating budgets? 📊 Here's the deal: they come with their fair share of challenges! From accuracy to adaptability, it's a whole rollercoaster. 🎢 But fear not! Working with a savvy accountant can be your golden ticket 🌟 to smooth sailing through those budgeting storms. 💼💡 Let's tackle those hurdles together and pave the way for financial success! 💪💼 #Budgeting #AccountingMagic #FinancialSuccess 🚀📈 or something similar - engage with humor!

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What are the most common challenges of using operating budgets to improve performance?

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1 Accuracy and reliability

2 Participation and communication

3 Flexibility and adaptability

4 Alignment and integration

5 Evaluation and feedback

6 Here’s what else to consider

Accounting

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