Accounting Best Practices, Fifth Edition

5–1. Link the Budget to Key Business Drivers

In many businesses, the budgeting process has acquired a reputation for a great deal of political infighting, because managers push very hard to ensure that their capital and department budget requests are approved before those of other managers, while also obtaining the lowest possible performance goals for the upcoming year. Thus, it appears that the budget is driven by the most politically astute and well-connected managers.

A much better approach is to link the budget to the overall corporate strategy, as represented by a set of key business drivers. By doing so, it is much more difficult for managers to twist the budget in their favor, when doing so clearly undermines the corporate strategy. For example, a car company’s president may have concluded that the use of alternative fuels is the company’s best hope for survival, so key business drivers for this strategy will be the development of an engine that can handle multiple fuels, a hybrid car, and the creation of a hydrogen-powered fuel cell. With all available funding going into these targeted activities, it will become painfully obvious if someone attempts to divert funding into the development of a low-fuel economy sport-utility vehicle.

The incorporation of business drivers into the budgeting process also tends to reduce the time period required to complete the budget, since less time is spent on political battles and budgeting minutia.

The main problem with this approach is ...