Why Starbucks Has Ditched the Annual Budget

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Thursday, September 5, 2019

Traditional budgeting methods can have drawbacks, such as creating a level of rigidity that makes it difficult for businesses to respond to market conditions. Starbucks is one company that has taken action to manage this risk.

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Effective budgeting is extremely important in business. It helps you:

  • Allocate resources
  • Identify goals
  • Evaluate your performance
  • Set long-term objectives for the organization

Given its significance, it’s vital to be confident that you’re using the right budgeting methods for your needs. Budgets that are too strict, for instance, can have disadvantages such as limiting your employees’ potential to use their intuition and think creatively, which could hinder your competitiveness in fast-moving markets.

One company that has decided to move away from traditional approaches to budgeting is Starbucks, which has enjoyed some positive results in 2019. Paul Harris, former EMEA commercial finance director at the coffee chain, said it has become highly important for planning processes to have a level of flexibility.

The disadvantages of traditional budgeting

Since the beginning of the 21st century, businesses have seen various factors come together to make traditional business budgeting practices less relevant than they were in the past.

Companies, industries and entire economies have been shaped by major events that are largely outside of their control, such as the 2008 financial crisis and the 2016 Brexit vote, which has caused ongoing uncertainty for businesses in Britain and across the European Union.

Furthermore, digital technology has evolved at an unprecedented pace in recent decades. This has transformed how members of the public access products and services, and how firms operate and do business with one another on a day-to-day basis.

As Harris told Financial Director, the rate of change is “only getting faster” and competition is “fierce”. Organizations that find the most effective ways to respond to these challenges will be the best-placed to get results.

“The increased volatility seen in the business environment has significantly impacted our performance at Starbucks, and our ability to accurately forecast. Acts of terrorism, currency fluctuations, adverse weather, declining footfall on the high streets and malls are all examples of external events that limit the effectiveness of traditional budgeting, as they outdate any key drivers or assumptions used.” - Paul Harris, former EMEA commercial finance director at Starbucks.

Ineffective budgeting raises a number of significant business risks, such as sub-optimal allocation of resources and failure to take full advantage of opportunities.

Starbucks’ response

One of the ways Starbucks responded to the challenges associated with traditional budgeting methods was to change its thinking around resource allocation, particularly in relation to long-term capital projects.

The company sought to move away from the common assumption that a particular activity being included in the budget means it’s automatically entitled to a certain level of spending. Requiring a clear business case to be put forward for every item or project that takes up a significant portion of available budget can help to increase the likelihood of securing a satisfactory return on investment.

Starbucks has also introduced a shift in budgetary focus from the numbers themselves, to the trends and drivers behind the numbers. This has been supported by an increase in finance business partner roles, which has helped the company focus on maximizing performance and managing risks in a timely, efficient fashion.

The role of finance business partners

Finance business partners can play an instrumental role in helping companies avoid some of the pitfalls of traditional budgeting, partly because they can provide real-time, day-to-day support to the finance team and act as a link between finance and the operational side of the organization.

Starbucks has gained some clear advantages from working with finance business partners, including increased commercialism in decision making and a shift in perception of the finance department. Rather than being seen as a barrier to progress in the business, finance can be viewed as a key source of support that helps to provide solutions, rather than blocking them.

“Business partnering is critical to the finance team at Starbucks, and one of the biggest changes implemented in the EMEA FP&A [financial planning and analysis] structure. Initially, the business was unsure of the role and the value it can bring, however now it is viewed as a critical addition to the business.” - Paul Harris.

Starbucks has clearly gained some key benefits from renewing its approach to budgeting, implementing new strategies and methods that could be a sign of things to come in corporate finance.

Comments

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17/09/2019 DB
Starbucks hasn't moved away from an annual budget though, its just introduced a new role to understand the underlying assumptions?

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