Effective Budgeting As with so many things in life, the key to effective budgeting is to find the right balance. Yet achieving that balance can be challenging. At some organizations, intense pressure for rapid growth from senior leadership or the board of directors pushes finance to develop an overly aggressive budget. While that keeps the peace in the short term, the likelihood that actual performance will fall short of budget projections leads to tension and distrust down the road.

 Meanwhile, the opposite approach—hyper-conservative budgeting—is rife with a different kind of risk. Setting the bar too low eliminates the aspirational potential of a budget, possibly thwarting needed investments and avoiding useful stretch goals on the revenue side that could be essential for driving growth and maintaining a competitive edge. This challenge is further heightened by the fact that the approach to business budgeting is usually viewed as an all-or-nothing proposition. Finance teams are locked in to creating budgets that are either overly aggressive or too conservative, and struggle to find a middle path that creates a balance between a budget that both reflects the reality of the organization’s financial capabilities while also providing for stretch goals that set targets for growth.