Budgets and other lies: Evidence of bias in financial planning

摘要

Budgets are considered by many to be a necessary evil. Within organizations, budgets are used to allocate financial resources to individuals who are charged with managing funds. This allows them to accomplish corporate goals and objectives. When reviewing the differences between actual and planned spending for a number of cost centers evidenced in data covering a 4-year period, it was noted that favorable variances exceeded unfavorable ones more than 50% of the time, although probability suggests that favorable and unfavorable results are equally likely to occur. As budgets are only best guesses about the future, these results indicate that planned spending was intended to manage uncertainty. In other words, the budgets were intentionally misstated that is, they were lies. This Executive Digest explores ways of uncovering these lies. The consequences of intentional misstatement of planned spending are serious. In such cases, financial resources are not only misallocated, but also allocated in a suboptimal way. This means that future borrowing costs may increase, important projects could be delayed, and necessary operating expenditures are not made. (C) 2017 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.