Budgeting During the Pandemic – Like Chasing the End of the Rainbow?

Budgeting is a fascinating topic; not because it is a perfect means of control, but because it is so common, and at the same time, very criticised. Almost all organisations of a certain size use a budget even though budgeting systems have been exposed to heavy critique over the last fifty years.

This critique focuses on several issues with traditional budgeting - it is very time consuming, creates a lot of gaming and tactical behaviour, and, most importantly, predicting the future can be extremely difficult. The pandemic has highlighted this final issue for organisations all over the world. For this reason, I sent out my students to have look at a dozen organisations and how they dealt with the budgeting process during the pandemic.

The studied organisations could be divided into three groups. In the first group, they carried on almost as if nothing had happened, but it should be pointed out that all organisations in this group already made new forecasts every month, as well as a detailed yearly budget. In the second group, the organisations increased the planning to monthly updates of their forecasts, rather than just a few per year. Just like the first group, they continued to do a detailed yearly budget, as well as the often less-detailed monthly forecasts. In the third group, the organisations stopped doing budgets and forecasts altogether.

In the first two groups, the purpose of the budget changed to some extent from controlling behaviour in the organisation to keeping track of liquidity. This makes perfect sense since cash was running out for many during the pandemic. Furthermore, one IT company stressed that budgeting was more important than ever during times of high uncertainty. For me, that is a difficult statement to grasp. Surely in these instances the budget is more likely to differ from the actual outcome. How can such a budget be more important than one that is close to the outcome, when it is most likely less relevant during preparation, execution and evaluation phases? The only explanation that I can think of is that it feels good, especially in times of high uncertainty, to have a budget or forecasts since they may give us a sense of knowing where we are going, even if it is only an illusion. In Sweden, we have a name for this phenomenon - the budget has become a “pacifier blanket”!

In the third group, both budgets and forecasts were abandoned as no longer meaningful, given the high uncertainty. The budget was replaced by historic figures as benchmarks for performance and in one case the corporate culture was stressed as important in replacing the budget. One person that the students spoke to ran an accounting firm which served a number of restaurants and hotels. The interesting thing was that the restaurants had all abandoned budgeting even before the pandemic, since they thought the restaurant business was too dynamic and uncertain. The hotels, on the other hand, had all stuck to traditional budgeting. According to the accountant, this meant that the restaurants were much better at adapting to the pandemic, whereas the hotels tried to stick to a plan that was obsolete. Eventually, the hotels switched from budgeting to rolling forecasts, and in the end abandoned the rolling forecasts as well.

Interestingly, the third group shares several similarities with the Swedish bank Handelsbanken, which became famous for abandoning the budget back in the 1970s. Handelsbanken work a lot with relative targets, like comparing the outcome with last year, but also comparing the branches with each other. The logic behind this being, “a pandemic effects everybody; if we perform better than our benchmarks, we’ve still done very well, even if the figure itself is disappointing.”

Another similarity is Handelsbanken’s focus on culture, including a very strong cost-consciousness. Finally, the restaurants and hotels performances also support one of Handelsbanken’s arguments for not using the budget: "Either you have your attention directed towards the internal plan, or towards the customers and the market!"

Göran Nilsson works as senior lecturer at Uppsala university and is internationally best known as co-author to the text book Management Control Systems. Göran is also very active in teaching practitioneers and his main interest lies in management and control of organizations working in an uncertain and dynamic environment. He has also co-authored a book about this topic, The Agile Company, that will be out in English next year.

The second edition of Management Control Systems  is available for puchase now.