#1 History of Business Budgets

Budgets have had a remarkable history. Here is a look at the Budgets in the past.

🎯In 1922, James Mckinsey publishes Budgetary Control.

With almost parallel timing with the activity happening at General Motors, in 1922, a book on business budgeting by James Oscar McKinsey dropped. McKinsey went on to become the founder of the famous consulting firm which bears his name. But his book, Budgetary Control which appeared on June 20 1922, established McKinsey as the father of business budgets.

McKinsey wrote in his preface: “Although much has been written of budgetary control as applied to particular phases of business, this is the first attempt, so far as the author is aware, to present the subject as a whole, and cover the entire budgetary program…It is the purpose of these chapters to show that the principles of budgetary control are as applicable to the individual business units as to the governmental unit, and to explain the method by which these principles may be applied.”

🎯In 1923, Donaldson Brown establishes the DuPont formula.

Frank Donaldson Brown (1885 – 1965) was a financial executive and corporate director at DuPont and General Motors Corporation. DuPont's ROA (Return On Assets) ratio developed for its own use reports on how effectively assets are used. Basically, it's ROA = (Net Income/Sales)*(Sales/Total Assets)=(Net Income/Total Assets).

The concept of return on investment (ROI) is one that is heard every day in the business world. Intuitively, the idea seems straightforward enough. If a firm wants to invest money into a project or product, then it should generate income or reduce costs that will benefit the firm over time.

🎯In 1976, Marvin Bower speaks to Congress about the vital role of business planning and budgeting.

The successor and student of McKinsey was Marvin Bower who continued his budgeting evolution. Bower eventually led McKinsey for 17 years and was appointed as the firm’s modern founder. Bower went on to advise the US government on its budgets, showing how the business world now held the upper hand in best practices. At the 1976 congressional Concurrent Resolution on the Budget, Bower told the congress:

“Economic reality dictates that no individual, family, business or Nation can long endure when it makes expenditures for goods and services that are beyond its means to pay for.” He also lamented attempts at forecasting as doomed to fail and made early appeals for what would later become known as scenario planning. Bower told Congress: “To try to influence the future you must forecast what it might be if you don’t act. But I must say, and you can check me two years from now, it isn’t going to happen the way you think it is going to happen. The record of controlling the future is miserable.

🎯In 1985, there is the launch of Excel used by 70% of businesses for budgets today.

The next major change in the history of budgeting did not involve an individual, but technology. In the 1970s and early 1980s, financial analysts would spend weeks running advanced formulas either manually or (beginning in 1983) on programs like Lotus 1-2-3. The launch of Excel in 1987 finally allowed budgeting including complex modelling in minutes. The pull of excel continues till today where courses on business budgeting describe Excel as vital to the process.

🎯In 2005, the Beyond Budgeting Movement questions the impact of budgets.

Businesses began a dedicated movement to change business budgeting from within. Beyond Budgeting aims to reduce traditional budgeting, and find ways to do business budgeting more frequently. It is the principle whereby companies need to move beyond budgeting because of the inherent flaws, and proposes a range of techniques, such as rolling forecasts and market-related targets in its place.

Robert Kaplan, of Harvard Business School, wrote in 2008: “Several companies in Europe and North America have questioned their use of the annual operating budget, a management tool introduced at General Motors nearly a century ago by Alfred Sloan and Donaldson Brown. Although the operating budget was a great innovation at the time, today’s dynamic and highly volatile environment has made an annual fixed operating plan an anachronism. Thus, there is a counterreaction to the high preparation cost, in time and money, of the annual operating budget. In addition, it is inflexibile in light of rapidly changing external circumstances and internal opportunities.

Ivo de Brouwer, finance director of Controlling Methodologies, at the French food group, Danone, witnessed this drastic shift from traditional to more modern budgeting. He says: “The old ways were still working in 1999. When I started my career it really was possible for a company to predict the world and what would go on.

Even in some circumstances, we could influence the future. In that world, it really makes sense that you make a yearly budget and a few times a year you look and see where we are deviating from this budget and ask how do we cope with that?” By 2016 the yoghurt-maker, like many companies, entered a world summarized by the trendy buzzword: Vuca (volatility uncertainty complexity and ambiguity). They found that the old budget process no longer cut the mustard (or indeed the yoghurt).

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