The budgeting process has to be one of the most ineffective practices in management. It often hides opportunity, stunts growth and encourages unproductive behaviours and mediocrity. In fact, when companies win, in most cases it is despite their budgets, not because of them.
And yet, as with strategy formulation, companies sink countless hours into writing budgets. What a waste!
Most companies use budgeting as the backbone of their management systems, so the right budget process can actually change how a company functions. And since reinventing the annual ritual makes winning so much easier, you just can’t afford not to try. Before considering how to devise budgets the right way, let’s look at two common bad dynamics that must first be addressed.
This dynamic begins once businesses in the field start constructing financial plans for the upcoming year. These numbers, which cover everything from costs to pricing assumptions, will be presented in several months at the big budget meeting at headquarters.
In all their assumptions, the people in the field have one simple, albeit unstated, goal: to minimize their risk and maximize their bonus. In other words, their underlying mission is to come up with achievable targets.
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Why? Because most companies reward people for hitting budget. Missing your budget gets you a stick in the eye or worse.
Meanwhile, back at headquarters, senior managers are also preparing for this meeting. Their agenda, however, is the exact opposite. Since they are rewarded for increased earnings, they want budget reviews to show significant growth in sales and profits.
Now, fast-forward to the meeting itself, a back-and-forth of probing and data quoting that concludes when both sides resign themselves to splitting the difference. Soon thereafter, the negotiated settlement is approved. Everyone leaves satisfied, but they shouldn’t be: There has been little or no discussion about what could have been.
The ‘phony smile’
Again, people in the field devote weeks to preparing a detailed budget plan. Eager to expand their business’ horizons, they have bold dreams about what they can do—make an acquisition, for example—given the right amount of investment. On the appointed day, the team, led by a manager we’ll call Sara, presents its case to top management. But despite the congratulatory remarks offered at the end of the meeting, the headquarters already knows how the company’s investment dollars will be distributed.
Upon receiving word that her business will get about 50% of what was asked for, Sara is enraged—headquarters just didn’t listen and failed to explain the reasoning behind the decision.
Still, to appease her team, she takes the money from corporate and evenly parcels it out. Of course, Sara should invest in one or two programmes instead, but that rarely happens. People stuck in this situation too often forget how excited they were about their original proposals.
The problem here is not with how headquarters allocated resources, but with how secretive they were about the process, with no explanation of the rationale behind their decisions. But, like the negotiated settlement, the phony smile usually concludes with everyone’s shrugging off the whole event. And the next year, they start it all over again.
A better way
These approaches often deliver only a fraction of what they could and take all the fun out of setting financial goals. Yes, this annual event can be fun—and it should be.
Imagine a system of budgeting where people in the field and at headquarters share goals: to use the budgeting process to ferret out every possible opportunity for growth, identify real obstacles and devise a plan for reaching for the sky.
Imagine a budgeting system that is not internally focused and based on hitting fabricated targets, but one that throws open the shutters and looks outside.
This budgeting system focuses on the following questions: How can we beat last year’s performance? What is our competition doing, and how can we beat them?
The budgeting process then becomes a wide-ranging dialogue between the field and headquarters about real-world opportunities and obstacles. Through these discussions, both sides jointly devise a growth scenario that is not negotiated or imposed. It is an operating plan for the next year, containing numbers that are mutually understood to be targets, or put another way, numbers that are ‘best efforts’ and that change as conditions change. Such flexibility frees an organization from the shackles of a budget document that has become irrelevant—or even downright dead—because of changing market circumstances.
Many managers will be thinking: ‘The budgeting process in my company is too entrenched to change the way you describe. What can I do?’
Don’t give up! This is too important. It may be awkward at first, but change will begin when you start talking, and one conversation leads to another and then another.
Very simply, the right budget process can change the way companies compete.
People usually groan when you mention budgeting, thinking that it’s just a necessary evil. It doesn’t have to be. It shouldn’t be. The change to a better way has to start somewhere. How about with you?
Adapted from Winning (HarperBusiness Publishers, 2005) by Jack Welch and Suzy Welch.
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Jack and Suzy are eager to hear about your career dilemmas and challenges at work, and look forward to answering some of your questions in future columns. Jack and Suzy Welch are the authors of the international best-seller, Winning. Their latest book is Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today. Mint readers can email them questions at firstname.lastname@example.org Please include your name, occupation and city. Only select questions will be answered.
©2009/The NYT Syndicate
Adapted from Winning (HarperBusiness Publishers, 2005) by Jack Welch with Suzy Welch.)