The Manager and the Budget
PETER F. DRUCKER
"Budgeting, in other words, is not a substitute for effective decisions. It is a tool of planning and decision making. And money is not a substitute for thinking, performance, and competence. People think. People perform. People have competence. They need money, to be sure, but without the people, money will only be wasted"
Next to double-entry bookkeeping and the copying machine, budgets are the most commonly used management tool. Practically every business, large or small, has a budget of some sort. And so has every hospital and every university. Above all, no government agency in the world operates without an annual budget. In fact, budgets are the only management tool that originated in governmental, rather than in business, practice.
The original budget, as it was first developed in its modern form in England during the nineteenth century, listed revenues from taxes, custom duties, and so on one side, and expenses on the other. This showed whether the government’s finances would be in surplus or in deficit and, thereby, whether to increase revenues, cut expenditures, or borrow money. It also provided the legal basis for a government department to spend money. Unless authorized in the budget, expenditure was illegal. It was thus the first effective check on the bureaucracy, the first systematic and orderly way of telling the governmental executive how much to spend and for what purpose.
All budgets, no matter how constructed, still serve these original purposes. They enable management—whether of a business, of a hospital, or of a government agency—to pull together its commitments, its plans and projects, and all its costs in one comprehensive document; the budget contrasts total expenditure with the total of expected revenues, thus arriving at a forecast of financial sources and financial requirements for the entire organization. Budgets still establish what planned and authorized expenditures are. And then budgets enable managers on every level to see whether events over the budget period actually follow the course predicted, or whether there is a shortfall of revenues, an excess of cost over the budget, or a significant change in economic performance of an enterprise, department, project, or product.
Almost every business today uses the budget to forecast and to control its financial needs and financial position. In particular, a budget is needed to enable the financial manager to anticipate the cash requirements of the business and to make sure that it obtains the necessary cash resources ahead of time. Every budget process, therefore, develops a “cash flow” budget.
In most businesses there is also a capital budget—usually extending over more than one year—which sets expected needs for capital against the various sources of capital and thus provides the basis for allocation of capital resources among various capital expenditures (e.g., between proposals for expanding capacity and proposals for developing additional markets). At the same time, the capital budget enables management to see whether the plans for obtaining capital are adequate to the capital needs of the business and to take timely action to bring the two into balance.
The Budget is a Managerial Tool
But the budget has grown to be far more than a financial tool. It is, above all, a managerial tool. It is the tool around which an experienced manager organizes all planning. It is the best tool for making sure that key resources, and especially the resource of performing people, are assigned to priorities and to results. It is equally a tool of integration for the entire workforce, and especially a tool of integration for the managers in the organization. And it is a tool that enables the manager to know when to review and revise the plans, either because results are different from what was expected—whether better or worse — or because environment, economic conditions, market conditions, or technologies have changed and no longer correspond to the assumptions of the budget.
The starting point for the budgeting process, especially in a business, should always be expected results. What results do we expect to obtain in this business over the course of the next twelve or twenty-four months? What results do we expect in this research department over the course of the next year or the next five years? Only when the expected results have been thought through carefully does one ask, And what efforts does this require?
Budgets are expressed in monetary terms. But monetary terms should be seen as symbolic expression — a kind of shorthand — for the actual efforts needed, and should be based on “real values,” that is, on people and materials needed, on work needed, on capacity needed. Budgets, in other words, should always be used as a tool to think through the relationship between desired results and available means. If they are looked at simply as a statement of cost, they soon cease to be the manager’s tool for planning and control. Instead they may degenerate into a straitjacket that controls the manager and inhibits correct action.
In particular, it is important to avoid the worst pitfall of budgeting, the pitfall into which government budgets tend to fall. This is the tendency to regard last year’s expenditures as being “about right” and to project them into the new budget. Typically, in this kind of budgeting, the manager starts out with the budget for last year and then either adds 10 percent across the board or cuts 10 percent across the board. This may give her a “symmetrical” budget. But it also means that she has not used the budget as a planning tool and is unlikely to use resources where they are needed.
Adapted from “Management: Tasks,Responsibilities,Practices”, P.330-340
