Operating Without a Budget (static or flexible)

The following are some of the considerations and process benefits of operating without a budget, as described by Bragg, Chapter 21, “Operating without a Budget”, page 181, ibid.  Included are  OIS‘s additional benefits, in bold: NOTE: As noted immediately above, these process benefits accrue in addition to the functional ones, described here.

  • Capital budgeting any time
  • Employees jointly set goals relative to the performance of other business units: OIS sets ALL performance objectives for all business units, optimally
  • Key point is that the capital budget and the forecast are not related to targets
    • By separating these processes from corporate targets, there is no incentive for employees to fudge their forecasts or fixed assest requirements in order to earn bonuses
    • No emphasis on budget variances since there is no budget: If desired, the actual results can be entered into OIS and reoptimized, normalizing the results for actual achievement just as with a flexible budget.  Only in this case, it is the entire income statement not just selected variable cost portions.
  • Critical senior managers step away from command and control
    • Local autonomy
    • Managers make their own decisions
    • Also senior managers must trust employees to spend money wisely: See flexible budget comment, immediately above.
  • Good replacement for a budget is a rolling forecast: once/month or once/quarter
    • Simple forecast that contains information only at an aggregate level: This is completely consistent with OIS’s aggregated level of detail
      • Revenues by product line
      • Aggregated expenses
    • Strategy without budget: two changes: OIS should be extended to the strategic time periods, uniting the annual and strategic plans.
      • Timing: ongoing process
      • Formulation authority: profit centers can make decisions with no further interference
    • Many companies find the higher accuracy level of rolling forecast makes it sufficient for their needs and so dispense with the annual budget entirely. Only now, with OIS, the functional and process benefits described above also accrue.  This makes operating without a budget a much more attractive alternative to the traditional budget.