From the Book “Budgetary Control” by McKinsey

Excerpts from the Book The Firm by Duff McDonald.

He narrates how American Businesses leaped with the scientific approach in Business Management.

In his book he shares how a single Book on Budgetary Control (1922) became the first definitive work on budgeting by Mr. Mckinsey, (Founder of Mckinsey Consulting) turned accounting on its head, promoting it as an essential tool of managerial decision making.

“Budgetary Control involves the following,” McKinsey wrote.
“1. The statement of the plans of all the departments of the business for a certain period of time in the form of estimates.
2. The coordination of these
estimates into a well balanced program for the business as a whole.
3. The preparation of reports showing a comparison between the actual and the
estimated performance, and the revision of the original plans when these reports show that such a revision
is necessary.”

McKinsey’s new way of looking at the use of the budgeting process sparked
nothing short of a revolution.

“No other mechanism of management of similar
scope and complexity has ever been introduced so rapidly,”.

“It is estimated that 80 percent of budgets installed in industry have been put in
since 1922.”

Budgeting was a one-way exercise: Accountants added up all of a firm’s expenses and then tossed in a sales projection almost as an afterthought.

In McKinsey’s view, companies should start by developing their business plan, figure out how to achieve it, and then estimate the costs of doing so.

In this new context, budgeting wasn’t just a ledger activity; it could also be used to identify excellence in performance (i.e., those who outperform their budget), to spot weaknesses (those who underperform), and to take corrective action. “[While] there are many who do not yet plan scientifically … ,”

Mckinsey wrote, “there are few who will deny the merits of the system.”

” In a 1925 in a conference at Newyork he said,

“Usually, I find that the executive who says he does not believe in an organization chart does not want to prepare one because he does not wish other people to know that he had not yet
thought through his organization properly. For the same reason many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods.”

With that clear insight and the philosophy of Scientific Management one can shape the organization’s destiny!


Source Article: The Longreads

Raman Azhahia Manavalan

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