Budgeting – It’s a lot more than ‘Last year plus (or minus) 10 percent’
By Susan Marshall, for SBT
Into your budgeting process for the new year? You may be finding it more perplexing than in past years, and may be wondering whether budgets set in the third or fourth quarter this year will have any reasonable connection to business activity of 2004.
There was a time when business results were somewhat projectable, leading to a shortcut process that simply took last year’s budget numbers and added a growth factor to determine the following year’s budget allocations. Close enough used to be good enough.
Furthermore, many budgets came with the admonition to spend what was there, lest they be cut next year. Over the past few budgeting seasons, cutbacks have been ordered, sometimes as across-the-board percentages, and sometimes in more targeted ways.
When we talk about creativity and flexibility in business, we’re usually referring to sales and marketing initiatives. Creative budgeting is not something anyone would advocate, especially in grim economic times.
But that’s precisely what’s needed now.
How does your company allocate financial resources? Do you take a holistic look across your operations, determine your priorities and then put money behind these priorities to make sure they get accomplished? If you’re like many executives, you’d like to say "yes," even though you know that’s not how your company goes about it.
In many organizations, budgets are set by forms and a process, usually led by the CFO who determines allocation categories based on history and then distributes them to operating execs. There’s little conversation about how money gets allocated or which initiatives are topmost on the organization’s list of needs. Working with historical data, best guesses about the future shape hard number allocations.
To the extent that it’s all we have to work with, I suppose one could say that’s as good as it gets.
I disagree.
When I ask managers about their budgeting processes, I often get exasperated sighs, slow headshakes and defeatist shrugs. "Our systems lock us into certain ways of thinking." "We don’t have the leeway right now to do some things we know we should. Money is too tight." "Now is not the time to fool with our budgeting process. There are too many other things going on."
It’s hard to listen to remarks like those without feeling agitated about the sorry state of leadership in our organizations. Since when do systems trump business experience and determination? If leaders don’t take "leeway" to do the right things, who will? What other "things" are going on that are independent of budget considerations?
These are poor excuses that bespeak a lack of true leadership in organizations today. Leaders take time to understand the business, set goals, establish priorities and allocate resources to get things done. They don’t do it in competition with functional peers; they do it to drive the company forward.
Leaders are not afraid of making budget decisions that others dispute. When it comes to explaining their choices, they point to clear organizational objectives as the basis for their judgments. It’s not about being numbers-smart — it’s about understanding a company’s competitive opportunities, knowing the assets at hand and lining up resources to move ahead with confidence and strength. That’s a far cry from "last year, plus or minus 10%." It’s also a lot harder.
There are times, for example, when marketing and production may need a boost in funds to drive a new product launch. For other departments or functional areas to demand equal funding on the basis of fairness is to demonstrate a lack of understanding of the business and a juvenile approach to tough business choices.
Another common basis for budgeting is the ROI model. While this can be a healthy approach, it is sometimes too exacting to make sense. Particularly in start-up or early-stage companies or projects, determining ROI is tricky at best.
Still, there are executives who believe that if it can’t be projected, it can’t be done. Do new ideas, equipment or people come to an organization with up-front assurances that any investment in them will be paid back in an acceptable timeframe? Does opportunity describe itself plainly and come with a spreadsheet of profitability attached? Of course not! That’s the challenge, and the sport, of business.
As you begin thinking about your budget for next year, set your forms aside. Reflect on the business. Gather the people who will be directly involved in your operations and listen to them talk about what customers want, how your internal processes work and what they need to work more effectively. Talk about what you want to accomplish together. Then go to your forms and arrange your numbers to support your plans.
When people provide budget numbers, ask where they came from. You don’t have to do this in a nasty way, just be curious.
A client I was working with recently took a SWAG at market potential. When I asked where the number came from, one of his associates leaned over and drew his hand along his backside. After a brief second of shocked surprise, the group broke into laughter. The point was made in a humorous way and set them on a new, more focused path toward business projections.
It you have unproductive budget debates raging in your company, fix them now. You may have the wrong people in leadership roles. It doesn’t matter how long they’ve been with you or how deep their knowledge of the business runs. If they are watching out for a narrow set of interests — namely their own — they are going to create or perpetuate problems.
If your systems lock you into old ways of thinking, prepare for continued hardship.
If, on the other hand, you can take a hard look at where you’ve succeeded in the past, where the opportunities lie ahead and make the sometimes-difficult choices to allocate resources – financial and human – to take an honest run at success, you’ll have a lot more fun and I daresay greater success.
One final point: Budgets are often giant and silent harbingers of culture. If you’re stuck, change your approach. Use your budgeting process to change the content and tone of conversations inside your organization.
Ask questions to probe opportunity: How can you be smarter about your clients? How can you learn more about the competition? How can you meld sales and production into a system that generates results on a sustained and profitable basis? Your answers will likely involve changes to information, people and processes. Don’t be afraid of these changes!
Create lists of ideas and fund the most promising. Stop telling yourself that when the economy improves, everything else will, too. That’s not true. You may find in this year’s budgeting process that some things need to be cut, deleted, removed forever because they no longer serve you. If you are certain that your cuts are necessary, make them with confidence. Be clear in your own mind of what you’re working toward and why.
With this confidence you will speak with greater conviction and you’ll find that others are more interested in hearing where you’re going. Imagine using a budget cycle to start a business transformation. And why not?
Susan Marshall is owner of Executive Advisor in Delafield, www.executive-advisorllc.com She can be reached at 262-677-1215.
Oct. 17, 2003 Small Business Times, Milwaukee
