Sebastian Stange, Bjarte Bogsnes, Hardik Sheth [Archive.org URL]

Traditional budgeting is like trying to square a circle, because the process tries to meet three ultimately incompatible objectives. First, budgeting sets targets to motivate and promote performance. These targets require directional and stretch goals. Second, budgeting provides forecasts of what lies ahead, but the forecasts only work if they are realistic, unbiased predictions. Production, for example, has to know what the expected sales are, as opposed to the stretch targets that sales strive to meet. In addition, the timeframes for useful forecasts can often be longer or shorter than the one year set by most budgets. Third, budgeting allocates resources by setting boundaries around future spending so that management can control costs and intervene to cut them when necessary. The C-suite typically tries to ensure that resources are allocated to the most value-creating opportunities while preserving short-term agility.

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