On our Beyond Budgeting LinkedIn group, Juan Carlos Mendoza Castro of Planeador Financiero en Grupo Incorpora asked, "What reasons are valid to change a budget?" It’s a question I often get. Here’s my response that provides ten quick reasons to change a budget:
Change your budget because:
1. Economic growth is coming in much stronger (or much weaker) than expected.
2. The overall environment you operate in has a major change (such as the nuclear power crisis after last year’s Japanese disaster).
3. Key commodity prices such as oil, steel, etc., are higher (or lower) than expected.
4. Key currencies are stronger (or weaker) than expected.
5. Competitors are reacting differently than you expected.
6. Or worse, competitors have taken the initiative by acting first, forcing you to respond.
7. Customers are reacting differently than you expected.
8. Key suppliers are changing the way they serve the market (e.g., they vertically integrate and in doing so, begin to compete with you).
9. You have become aware of new technology or new ideas that can dramatically improve your business.
10. Key human capital talent (such as an outstanding sales resource) has become available.
Basically, change the budget at any point that the key assumptions it is based on are no longer valid. This often means you either have to freeze your assumptions while the budget is being produced, or you change it multiple times during development.
Most of what masquerades as "planning" is typically negotiations over which assumptions to use and attempts to maintain "budgetary slack" (or "cushion" or whatever other term your organization uses to describe what most people know as "sandbagging").
The better question to ask is, "Why should you create a budget all?" Many organizations have improved their planning and control practices by stopping budgets and adopting the 12 Beyond Budgeting principles. Join us at the 11th Annual Beyond Budgeting Conference in Houston on April 18-20, 2012, and you can hear how they have done it. Click here to register.
