Should you budget for innovation?

Estimated reading time: 4-6 minutes. Should you budget for innovation? Organizations are calling for ever greater budget management of their product innovation processes. Key reasons for this focus are partly costs for product innovation, and partly the need to improve companies’ financial performance through innovation initiatives. On the other hand, previous research has identified a number of questions related to budget management and product innovation. It has been pointed out that the creativity of employees involved in product innovation should not be limited for cost reasons, that the use of economic governance is incompatible with product innovation, and that the use of budgets can actually suffocate innovation.

 

Budget for innovation

Budget for innovation

A study examined the link between product innovation, budget management, and companies’ financial performance. The study conducted a random selection of 119 executives in listed companies in Australia. The companies that participated in the study represented various industries such as pharmaceuticals, appliances, chemicals, building materials, and food. A total of 77 managers participated, corresponding to a response rate of 65 percent.

 

Use budget as a planning mechanism

The study found that if product innovation has a positive impact on companies’ financial performance, this depends on what budgets are used in companies. If budgets are used primarily as a planning mechanism, this results in facilitating product innovation, which in turn results in improved financial performance. However, if budgets are used primarily as a control mechanism, product innovation is unlikely to contribute to economic development. The results of this study indicate that the way in which budgets are used in product innovation processes is crucial to the influence that innovation has on companies’ financial performance.

 

Budgetera innovation

Source: Dunk, 2011, p. 108

The conclusion is that companies should use budgets primarily as a planning mechanism in product innovation processes, not as a control mechanism. Budging for innovation can be positive for corporate innovation and financial performance – when the budget is used properly.

 

References

Dunk, A.S., 2011. Product innovation, budgetary control, and the financial performance of firms. The British Accounting Review 43 (2), 102-111.

http://www.sciencedirect.com/productinnovation/budgetcontroll

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