What are the top mistakes to avoid when using operating budgets for performance improvement?

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Operating budgets are essential tools for planning, monitoring, and evaluating the performance of a business. However, if they are not used properly, they can also lead to poor decisions, wasted resources, and missed opportunities. In this article, you will learn about some of the common mistakes that managers and accountants should avoid when using operating budgets for performance improvement.

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Asha Kanta Sharma

Manager - Finance & Accounts @ Opendoors Fintech | Financial Accounting

1 Mistake 1: Setting unrealistic or irrelevant targets

One of the main purposes of operating budgets is to set clear and measurable goals for the organization and its units. However, these goals should be realistic and relevant to the current situation and the desired outcomes. If the budget targets are too high or too low, they can demotivate the staff, create unrealistic expectations, and distort the actual performance. Similarly, if the budget targets are not aligned with the strategic objectives and the customer needs, they can divert the attention and resources from the most important areas. Therefore, you should base your budget targets on accurate and reliable data, market analysis, and stakeholder feedback.

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Asha Kanta Sharma

Manager - Finance & Accounts @ Opendoors Fintech | Financial Accounting
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Operating budgets are a strategic tool for organizations to improve performance by aligning financial plans with their overall goals. However, several mistakes can undermine their effectiveness. These include not aligning the budget with strategic goals, insufficient communication, setting unrealistic targets, ignoring historical data, excluding key stakeholders, adopting a static budgeting approach, poor performance measurement, inadequate training and support, ignoring variance analysis, micromanaging rather than empowering teams, failing to adapt to changes, not incorporating feedback, overlooking risk management, ignoring external factors, setting arbitrary cost-cutting goals, focusing solely on short-term goals,

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Asha Kanta Sharma

Manager - Finance & Accounts @ Opendoors Fintech | Financial Accounting
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neglecting continuous improvement, lacking scenario planning, ignoring employee morale, and not celebrating achievements. By avoiding these mistakes, organizations can leverage operating budgets as powerful tools for performance improvement, strategic alignment, and sustainable growth. A well-executed budgeting process contributes to overall organizational success and resilience.

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2 Mistake 2: Ignoring external factors and uncertainties

Another common mistake is to assume that the operating environment and the conditions will remain stable and predictable throughout the budget period. However, this is rarely the case, as there are many external factors and uncertainties that can affect the performance of a business, such as changes in demand, competition, regulations, costs, technology, and so on. If you ignore these factors and uncertainties, you can end up with a budget that is outdated and irrelevant. Therefore, you should incorporate contingency plans, sensitivity analysis, and scenario planning into your budgeting process, and update your budget regularly to reflect the changes and risks.

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3 Mistake 3: Focusing only on financial indicators

Another common mistake is to focus only on financial indicators, such as revenue, profit, and cost, when using operating budgets for performance improvement. However, these indicators are not enough to capture the full picture of the performance of a business, as they do not reflect the quality, efficiency, customer satisfaction, innovation, and sustainability aspects. If you rely only on financial indicators, you can miss the opportunities to improve the non-financial aspects of your business, which can have a long-term impact on your competitive advantage and growth. Therefore, you should use a balanced scorecard approach, which includes both financial and non-financial indicators, to measure and improve your performance.

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4 Mistake 4: Imposing top-down or bottom-up budgeting

Another common mistake is to impose either a top-down or a bottom-up budgeting approach, without considering the advantages and disadvantages of each. A top-down budgeting approach means that the senior management sets the budget targets and allocates the resources for the lower-level units, without involving them in the process. A bottom-up budgeting approach means that the lower-level units prepare their own budget proposals and submit them to the senior management for approval. Both approaches have their pros and cons, depending on the size, structure, culture, and complexity of the organization. If you impose one approach without considering the other, you can create conflicts, inefficiencies, and inaccuracies in your budgeting process. Therefore, you should use a participative budgeting approach, which involves both the senior management and the lower-level units in the budgeting process, and fosters communication, collaboration, and accountability.

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John Miller

THE STARTUP CFO | Follow for posts about financial focus, startup strategy and leadership
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Of course there is not a one-size fits all policy. But if there had to be a starting point, it would be too down. The rationale for this is that the big strategic picture needs to be considered by a few, then rolled out to the many to see if it is possible. Then collaborative working to ensure that the Bottom up view matches what is required (the top down).

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5 Mistake 5: Using budget variance as the only feedback

Another common mistake is to use budget variance as the only feedback for performance improvement. Budget variance is the difference between the actual and the budgeted results, and it can be either favorable or unfavorable. However, budget variance alone does not tell you why the difference occurred, how significant it is, and what actions you should take to correct it or prevent it in the future. If you use budget variance as the only feedback, you can overlook the root causes, the underlying trends, and the potential consequences of the performance gap. Therefore, you should use budget variance analysis, which involves identifying, explaining, and evaluating the reasons and the impacts of the budget variance, and recommending corrective or preventive actions.

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John Miller

THE STARTUP CFO | Follow for posts about financial focus, startup strategy and leadership
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Understanding the fundamental “whys” behind any variance is critical. From my experience, providing analysis to detail the variance further can help. For example on revenue showing what of the variance is volume and what is price will help narrow down where the why is needed. Good Analysis will ensure you get to the right answer.

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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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What are the top mistakes to avoid when using operating budgets for performance improvement?

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1 Mistake 1: Setting unrealistic or irrelevant targets

2 Mistake 2: Ignoring external factors and uncertainties

3 Mistake 3: Focusing only on financial indicators

4 Mistake 4: Imposing top-down or bottom-up budgeting

5 Mistake 5: Using budget variance as the only feedback

6 Here’s what else to consider

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