Does your budget reflect what mattered in the past or what matters now?

Last week I was teaching on the National Graduate Development Programme (NGDP) at Warwick Business School and one of my sessions was about budgeting. Although there are lots of possible approaches to budgeting, my experience of the real world means that next year's budget is based upon this year's. There might be some fancy work done around the edges to make the process a bit more rational but the bulk of budgets will be last year's budget with inflation added and a percentage applied for cuts.

There are advantages with this approach, not least that it is stable. But it is stable because it is understandable and it's understandable because there's a collective acceptance that "we had a budget for it last year, we must've needed it". But the pressure to find cuts emphasises the downside of this approach: it encourages us to continue doing what we've always done, perhaps a few percentage points more efficiently, rather than challenging what it is we're doing.

What I like about this blog post by Simon Pithkall is that he suggests a very simple way for leaders to establish what the purpose of their service is. It seems to me that after spending a day finding out what really matters to the real customers leaders would be armed with some very important information/evidence to help them work out (a) what they should be doing and (b) what budget they need to do it.