Business

Strategic Implications of Organizational success on the face of Budget constraints.

Many of us are familiar with the answers that always come from our supervisors, “this is a great idea or opportunity but we don’t have a budget for it”. It gives an impression that budgets controls our life, if you like, that we are for the budget, not the budget for us. If this is the case it can be very sad for a business to leave an opportunity that is considered great by the organization just for the sake of budget compliance. This leads to the question as what is our understanding or interpretation of a budget and is it that confining?
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Simply put, a budget is an itemized summary of likely income and expenses for a given period. It helps you determine whether you can grab that bite to eat or should head home for a bowl of soup. It provides a concrete, organized, and easily understood breakdown of how much money you have coming in and how much you are letting go. It’s an invaluable tool to help you prioritize your spending and manage your money—no matter how much or how little you have. Creating a budget will decrease your stress levels because, with a budget, there are no surprises.

This definition portrays budgets as something limiting. For the Soccer lovers, especially those who follow English Premier League, there was this surprise package that won the league. A handful of lucky punters began to collect their winnings after 5,000-1 longshot Leicester City did the unthinkable in winning the Premier League title this season. The title victory by Claudio Ranieri’s side was branded ‘a miracle’ and a once in a lifetime achievement by pundits, with the astonishingly long odds offered at the start of the season used to highlight quite how unfancied the side were. Those odds beg the question of how any side in a 20-team league could end up at 5,000-1 and rated a less likely prospect.

So do you think Leicester city budgeted to win the premier league? The reality, which is very brutal for the likes of Arsenal is that it came to pass. Leicester stand to benefit to the tune of a quarter of a billion pounds after clinching the most unlikely title triumph in Premier League history. The Foxes, who started the season as 5,000/1 rank outsiders, can expect to bank almost £250m from prize money, a bumper new broadcast deal, Champions League qualification and rising brand value.
They will be due approximately £92m from the Premier League in prize money and television payments for finishing first. Yet next season they can expect that to rise to a minimum of £100m even if they suffer a collapse almost as unprecedented as their current campaign and finish bottom, while participation in next season’s Champions League should add another £30m to their coffers.

For the next season, its easy to budget since it’s foreseeable revenue and may be expected expenses but the more interesting questions to ask, is, did Leicester city budget for the celebrations for the win that involved the trip to south Korea, the hometown of the owner? Did they have a trophy cabinet, good enough to safely store the premier league trophy? Did they set-aside enough money to keep their star players at the club since they face the risk of being bought by the big money spenders who wish buy the team plus the coach. This is where budgeting baffles me in the face of unprecedented organizational performance.

The Leicester city narrative needs to shift our understanding of budgeting. To say that with a budget, there are no surprises is misleading because there is no way one can predict the future with certainty. The most important take here is that a budget is an itemized summary of likely income and likely expenses. That means that time comes when it calls for going against the budget for great opportunity that could be lost or for taking care of a risk that was unforeseen. If one of the employees has performed beyond your expectation, hence beyond your budget, reward him with what he deserves as opposed to hiding behind the budget since you loose an opportunity to boost employee morale. Can Leicester city sit back and say they didn’t budget so they wont spend. As we speak, they are acting against their budget.

To use a budget as the ultimate tool to make decisions is very limiting. I know institutions measure deliverables in terms of quality delivered within the required time frame and on budget but I believe value should be measured more in terms of time and quality and budget isn’t an ultimate criteria of performance. If budget is then the implication is that we measure value in terms of money. This means that organizations exist to make money. If organizations exist solely to make money, surely there could be greater reasons for organizational existence than to make money. It should rather be stated that organizations make money to exist that organizations exist to make money.

Written by Dr. Fredrick Onyango Ogola ,
Senior Lecturer- Strathmore University

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