Here we are again. It’s August, and many of us are staring down the barrel of another annual budgeting process. It's enough to make an FP&A professional ask the big, existential questions: What is a budget? Does a budget even matter?
AFP actually did ask these questions in its 2017 member survey, “How Relevant is Your Budget?” The results and analysis of this survey will be available in November this year, but we can think about these questions now.
The word “budget” derives from Latin word “bulga” which means a leather bag, much like a wallet. In the 15th century, a French trader might give a bougette, or wallet filled with cash, to a ship captain to purchase items and be shipped back. In the 1750s in England the budget became associated with the amount of money that a governmental ministry would have to spend on its activities.
This history of the word is interesting because elements of this “fixed amount of cash” is clearly with us today, especially when we say, or hear someone say, “that is not in my budget.” They are saying that they do not have the spending authority or financial resources to pay for something. “The budget has always been a plan used to hold people’s feet to the fire,” said Pete Geiler, FP&A, a member of AFP’s FP&A Advisory Council. That is, holding them accountable to their budget allocation.
Meanwhile, Investopedia defines the budget as “an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis.” Budgeting is tied to planning by saying that is “where a business wants to go.” Additionally, it ties to performance reporting by creating a baseline to compare actual results and study the variance. This view of budgeting relates more to forecasting, planning and performance measurement.
Which of these viewpoints—performance accountability versus forecasting and planning—represents how organizations actually use budgets today? Is it reasonable to expect the budget to serve so many purposes? Perhaps it is time to redefine budgets to make them relevant for our current era.
The AFP survey asks about the definition of budgets as seen through the eyes of practitioners who interact with them every day. From there, the survey moves on to how the budget is used on a daily basis, and by whom. The goal is get beyond the rhetoric around the difficulty of the process and understand the utility of the budget itself. Does it still have a purpose?
As good analytical finance folks, we all want to know whether we are getting a return on the investment of time and effort. We look forward to your input.
The 2017 AFP FP&A Survey: How Relevant is Your Budget? will be open to AFP member responses through September 8. If you would like to participate in the AFP budgeting survey email AFP Director of Research Mariam Lamech.
Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him at BLapidus@AllegianceAG.com.