Discover how to use budgeting as a management practice to help make decisions.
For some time, many managers viewed budgeting as a tool that merely helps plan an organization's cash flow. However, organizations are increasingly evaluating budgeting as a management practice, as it allows for the planning and control of activities and facilitates the decision-making process. It is understood that by achieving budgetary goals, the organization is automatically fulfilling its plan, considering that the budget serves as guidance for the accomplishment of the plan.
Guilherme Barbassa, director of Stratec, explains that in reality, the budget reflects an action plan. It translates the action plan into monetary values: how much we intend to receive (revenue), how much we will have in costs (expenses), and how much we intend to invest. “So these values depend on the strategy and action plan that the company is defining, the strategy of the company's tactical and operational plan.” He also warns that organizations must treat the budget within a management method, meaning they must treat the budget systematically, verifying if it is being executed as expected and if the results are also as expected. If not, the need for replanning arises. “The budget must also be treated within the PDCA method,” he emphasizes.
Priscila Nogueira, Director of Strategic Alliances at Stratec, believes that the budget, when used as a management tool, has arguments both for and against its use. “However, its pros outweigh its cons, and I understand that the budget is currently the most widely used management tool in today's organizations,” she states.
Barbassa warns that, often, managers treat the budget as a static, fixed element. But, every plan starts with a hypothesis, with an assumption. “We think that by following this path, we will get the expected result. But this has to be periodically verified. It may be that the original assumption turns out not to be true, or it may be that it was true when we made the plan, but the scenario has changed. Or it may be, still, that the initial hypothesis was not even true. So you execute the plan, but the result doesn't appear,” he says.
According to Priscila, for a budget to be an effective management tool, it must be based on parameters that reflect the organization's operational performance, both past and future. It should also not be composed of numbers that merely repeat the past, but rather be the result of careful analysis of how the organization achieved its past numbers and how it will work to implement its strategy and reach new performance levels in the future. “A budget without an action plan is a set of good intentions that may never become reality, compromising the organization's position and competitive advantage,” she states.
Barbassa agrees and adds that if you only work with revalidation of past budgets, you end up stuck with a past strategy or no strategy at all. “The budget must be integrated with strategic planning,” he warns. He also cites a study by the Balanced Scorecard Collaborative, which states that 90% of organizations fail to execute their strategies successfully. And one of the reasons for this failure is the lack of alignment between the budget and strategic planning. According to the director, budgeting is a management practice that should be part of a broader management model. “This model must integrate various aspects, from strategic management, project and process management, people management, and the budget itself. The model must encompass all these parts. The budget should not be treated in isolation as if it were self-sufficient,” he reinforces.
