Does your company’s budget do the following?
– Allow you to see risks as mere molehills.
– Enforce decision-makers to use resources only to further their strategic goals.
– Change as your clients or market does.
If you answered all 3 with “yes,” congratulations! You have a world-class budget system. If you did not, then something crucial is missing from the budget process.
The purpose of a budget is: To allocate and control spending decisions and to ensure that every decision is ‘smart’ and moves your organization forward in achieving its objectives and goals.
For your budget to accomplish this, there are four components required to support budgeting. If even one of these components is weak, the resulting product will be ineffective.
The four components are: 1) system, 2) mechanics, 3) environment, and 4) mechanism for change. Guess which ones are most often missing in action? All firms do a great job with the system and mechanics because it’s easy. Where nearly all firms fail is:
– A culture that supports both accountability and visionary planning.
– The budget’s ability to adapt quickly as the business evolves.
Solution #1 – Remove the Fear
An easy way to improve your budget culture is to remind everyone often about budget rule #3: Budgeting is about potential! Each year as you draft your budget, what you are really doing is attempting to put into written form your company’s potential – potential revenues, potential profits, and potential ability to satisfy your customers with the financial and people resources you plan to have in place.
Do you always live up to your personal potential? No! But you never let that stop you from trying to improve and grow. The same holds true for your company’s potential. You will miss the mark 99% of the time and yet you still want employees to make smarter decisions and continue to use their resources ever more wisely.
When you talk about the budget as “detailing our potential” on paper, you will discover an amazing transformation. The fear of budgeting leaves and is replaced by a commitment to live up to the potential. This is the experience that many companies have when they start talking about the budget this way, replacing “budget” with “detailing our potential.”
Solution #2 – Measure What is Most Important
See if you can pass my test. Assume that you cannot come to work for a month and could only receive one item of information about the business each day. This info tells you whether the company is succeeding or failing. What do you need to know about the business? Oops, I almost forgot. This data item cannot be: SALES or REVENUES, MARGINS, PROFITS or CASH FLOWS. What do you need to know?
If you could only think of the four forbidden items, then you do not know what is most important about your business! I use this test on executives and accountants to check if they know the most critical aspect of their businesses.
This data point or “Critical Success Factor” is the starting point for a budget that adapts to changing conditions. Start by defining your CSF, setting targets and a way to measure. You do this for every revenue center, each department, division, and team. Once you have identified them and how to best achieve your CSFs, only then do you build a budget. Your budget is built around your success factors, not the other way around.
Solution #3 – Tell Stories
Stories are powerful because everyone loves to hear them and good stories carry a message that people remember.
A new tool is now out that will allow you to use stories as a means for improving your budget process. Leadership: The Key Ingredient to A Great Budget highlights real-life tales about how the budget either worked or didn’t. Each story contains a key principle about great budgets. It also challenges the reader’s thinking and biases about doing proper planning. Its format is designed to spur readers to create an action plan as they read the book. The wry humor injects fun into a subject that many people take way too seriously.
The book is designed for executives, and for CFOs and Controllers to provide a copy to budget managers. It can open a dialog on what is right and wrong with the current process and how to improve it.