Corporate budgeting is steeped in accounting terms. The actual view of what is really going on is hard to find in a departmental variance report.
I suggest that a budget should really be more project based. This means that the resources and effort is grouped to see the cost and benefits of initiatives within the organisation.
Traditionally the costs are grouped into departments and classified as indirect/direct costs and subsequently may be allocated out to direct departments. But that doesn’t really give a view on what the department is actually doing.
The Finance, IT or Marketing department for instance are viewed as supporting departments and incurring sustaining costs. They have, however, key roles in completing and driving initiatives that provide strategic benefits to the organsiation.
I submit that budgets should, at first cut, be categorised into two types: sustaining costs which don’t intrinsically provide strategic benefit but are needed to stay in business e.g legal and compliance costs; and strategic costs. Strategic budgets are the projects and initiatives which are needed to reach the company’s objectives.
Strategic initiatives can be further categorised as, for example, acquiring new customers, retaining talent, innovation, project management. Contrast this to the typical budget which categorises into costs such as rent, depreciation, telecommunications, travel and entertainment.
For instance, what does a budget for travel really tell us if we are over or under, for instance? Isn’t the important issue the reason for the trip? Travel to a new business meeting for a prospect is really cost to acquire new customers. Travel for an IT rep possibly relates to business plans to roll out mobile technology for the workforce. One is a marketing cost the other a project cost.
A budget thus allocated means that you are left with a much smaller element of overhead or indirect costs. Instead we have a clearer picture of the goals and plans of the organisation and then a better picture on how we are tracking in achieving those goals.
This isn’t a change which can occur overnight. However, organisations can make a start by gradually reducing the pool of costs in the ‘overhead’ locker and allocating a greater proportion to the purpose of the cost and expected benefits.