“Yayyyy!!! Budgeting season” Said no one ever.
For most of us – budgeting season is just around the corner. Sadly, most stakeholders and participants look to the budgeting process like a trip to the dentist for a long, painful root canal. This ethos has existed for decades, but mostly because organizations have not evolved or matured the process overall. It is treated as a ‘season’, and most organizations want to get through the season as quickly and painlessly as possible.
If this ‘season’ is universally loathed, why do organizations continue to ‘check the box’ and perform the same tired song and dance act every year? A financial budget is not a Panacea for success in and of itself. In fact, budgeting should not be viewed as a ‘season’, but instead an extension and reflection of ongoing focus on value creation and philosophy.
To be clear, there is a sequence that every organization should (hopefully) follow that budgeting fits into.
Strategic plan before budget. As simple as that.
- Strategic truths – what business and markets are we in, and are we where we want to be? How do we choose to compete, and what choices must we make to execute on those choices?
- Strategic plans – What resources (people and capital) do we choose to deploy to align with our strategy
- Financial Budgets – What does all of this cost (Opex and Capex), and what will we gain (Revenues)?
- Financial Forecasting – How and when will we adjust to new information?
This post is not about strategic planning – that is an entire MBA course wrought with diverging schools of thought. The above list is to help everyone understand the sequencing, and thus tie Financial Budgeting to the bigger picture.
Ok, so we understand the WHY companies SHOULD budget – it is part of a sequencing framework. But what are some of the other value propositions that uphold the reasoning?
- A discipline. Capital is not infinite for organizations. It is constrained. Budgets are a rule book for spending – what, when, and how much (the why should be determined in advance). Managers and budget owners are much more apt to consider their spending if they know that they have parental framework with which to spend their allowance. This also forces budget owners to practice basic economic decisions: efficiency, benefits and trade-offs. It provides a common base of measuring how well managers have accomplished their activities with the assigned resources (costs).
- A motivation. As abstract as this concept is, articulating spending limits helps employees to create their own action plans around spending. They feel connected to where the company is headed. It inspires entrepreneurial thinking, quantifiable goals, and can result in a unified, engaged, and committed team. A budget results in more granular level tactical planning, and interdepartmental coordination to optimize outcomes.
- A consistent message. Everyone wants an organization to succeed and continue (other than your competitors). But stakeholders need assurances of the structure behind the plan. Having this ‘road map’ keeps all stakeholders in agreement with the company’s objectives and the plan for meeting them. It formalizes the coordination of activities between departments while aligning them with the Strategic plan. It assigns managements responsibility and decision making with the same goal in mind.
Now that we have established why companies should budget, how do we know that we are engaging in ‘best practices’ of budgeting? Long established budget practices provide a false sense of security and fail to cope with the speed and volatility of today’s economy. Organizations that are ‘rock stars’ at budgeting didn’t get there by accident. Industry leaders budget well using a combination of the best tools and technology, i.e., budgeting software, as well as strong controls and processes, and an instilled culture of engagement and accountability.
In fact, organizations that budget well enjoy competitive advantages in their industry. This is because they have invested the time and efforts to measure and align the right resources to deliver on competitive advantage. Competitive advantage is all about understanding what an organization needs to achieve to differentiate themselves, gain market share, or somehow leave their competitors in the dust. This may seem simple and obvious, but the process to realize this goal can be tedious and time-consuming. A budget is essentially what actions to take, and what resources are needed.
Next week – In part II, we’ll explore several examples of best practices to employ along the budget journey.