We often discuss budgeting in our firm, and I often write about budgeting because it is such an important topic in any company. As a consulting firm, we deal with this issue at almost every client. Let’s rehash some basics… Why is budgeting important? As properly stated by Ron Real (the author of 13 ½ Strategies for Winning the Budget Wars), “To achieve success in anything, you need two ingredients: a target to aim for, and a way to measure your progress towards it” (more from Ron Real below). Before we go into creating successful budgets, let’s address the common problems with budgets.
Common Problems with Budgets
We deal with clients all the time that either do not have a budgeting system in place, or they have the wrong budget system. The following are some of the most common problems we see with budgets at some companies:
- Lack of accountability
- Employees ignore the budget, don’t follow it, or find ways around it
- Only applies to some groups/managers and not to others
- Results in fights or power plays, or managers play games
- Budget process takes too long and consumes too much of people’s time
- Budget is wrong from the beginning
- Established goals are either easy to reach or unachievable
- Filed away when completed – lack of follow up
- Built on faulty or unrealistic assumptions or not everyone agrees on the assumptions or principles
- Budget performance and financial feedback is slow or nonexistent
Successful budgets are possible, but the TONE STARTS AT THE TOP. If the leadership or Board does not take the budget process seriously and does not hold others accountable, then you will have a problem with the budgeting process. You can build a budget and a budget process that is well conceived, creates a visionary plan, and shares resources. The budget process is very much a team effort, but it often needs to be taught to others in the organization.
4 Budgeting Rules
Successful budgets are created by following rules and principles developed over my 28-year career. You can find all these rules and principles in the Budgeting 101 Execution Plan inside the SCFO Lab. Let’s look at 4 budgeting rules that help create successful budgets.
Rule #1: Decision Making Tool
The budget is a tool for decision making. It is not a disconnected document that has little to do with the company’s actual business. Start by reframing your and your CEO’s perspective on the purpose of a budget in a business.
RULE #2: Management Tool
RULE #3: The Plan
A budget is establishing the discipline to set up a plan and then adhering to the plan. In fact, 94% of all ineffective budgets are the direct result of weaknesses in the organization’s corporate structure. Some of these weaknesses include the following:
- Inadequate leadership
- Poor communication
- Conflicting goals
- LACK OF ACCOUNTABILITY
Hint: Be disciplined and follow the plan!
RULE #4: Problems Exist
Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME! If your company is experiencing budget problems, then it’s time to look at what the problem really is. Issues that are probably already part of the corporate culture, but many times ignored, include the lack of:
“Without a yardstick, there is no measurement. And, without measurement, there is no control”
– Pravin Shah
There are many other rules to budgeting and basic principles, but we can not cover all of these in this one blog; however, we do cover this topic at length in our Financial Leadership Workshop (Day 4) and our SCFO Lab’s Budgeting 101 Execution Plan.
Understanding how budgets really should work is critical. I recently had an executive tell me that he did NOT believe in budgeting because it just meant that people now had the authority to spend everything allocated to them at the end of the year. Unfortunately, this executive was thinking of budgeting like the government thinks about a budget. You have $1,000 for the year, so you must spend it by year end. That is NOT a corporate business budget or budget process. That is a very flawed interpretation of budgeting.
If I could use just one word that describes why it is important to have a good budget process, it would be “accountability”. A budget will force your team to be held accountable. But, if that theme of accountability does not start with the Tone at the Top, then you are guaranteed to have a flawed budget process.
Suggestions to Create a Successful Budget
Other quick suggestions to create a successful budget include the following:
- Set goals and objectives that push for growth and efficiency, but keep those goals and objectives realistic. There is nothing more demoralizing than to have a unachievable goal.
- Start your budget planning process early. For a calendar with year end at December, start no later than August of the current year.
- Measure your actual results every month versus budget, and hold people accountable.
Adhering the these budgeting rules and reframing budgeting to your CEO and leadership team is just one example of how you as the financial leader can act as a wingman. If you want to step up and be the trusted advisor your CEO needs, click here to download the How to be a Wingman Guide.