Top Five Budget Pratfalls


Think | Act

One in a series of Leadership Articles to cause you to think and perhaps to act. Read other articles.


In our work we often get involved with budget review and preparation for small businesses. In many engagements we have been asked to review specific budgets and comment or provide advice and improvements. While there is no absolute formula to creating budgets there are some areas that seem to continuously creep into planning that can be avoided to ensure you get the best budget for your effort. Here are five areas that many budgets fail;

No link to strategic goals

The best laid plans at the budget level are all-for-nought if the plan does not align with the strategy of the company. This is an all too common trait that companies fail to connect the dots. In some instances we have seen companies scribble off strategic views of their business from the numerous spreadsheets they had prepared earlier. This is a recipe for disaster.

Step one of a budget exercise is to develop the strategic goals of the business (unit, project or group) and make sure this has buy-in at the highest levels of the organization. Then develop the high level criteria that will drive the sales, operations and support activities.

Short shift

A budget built to span too short a period of time is ineffective. We recommend that most companies, we work with, develop plans that span at least three years. Year one will be laid out in monthly detail and the following two years will be developed at a higher level. Failure to plan at the detail level will often result in a limited ability to match your plan to actual expenditures.

As the first year progresses be prepared to start adjusting your outlook for the next year based upon gaining more experience operating against your plan. This will also have the secondary benefit of getting your budget built quicker in the following cycle.

Faulty Assumptions

The harder you fight to hold on to specific assumptions, the more likely there’s gold in letting go of them.

John Seely Brown, Fast Company

In many instances we see companies build both strategic initiatives and budgets on very shaky assumptions. It is imperative that the company be both realistic and objective about its adoption of assumptions. Any assumption that impacts the direction of the business should be formally communicated, researched as completely as possible, and subjected to rigorous discussion, review and critical analysis. Assumptions cannot be taken at face value.

Now we’re a not proposing a no risk approach here, what we are supporting is a fully informed risk taking model. Every company needs to take risks but those risks should be based upon assumptions that have been evaluated completely and agreed to at a senior level of the business.

Hockey stick

Our method of budget analysis looks at the overall ’shape’ of the budget. Too often shortcuts are taken to complete budget exercises, which ultimately get accepted simply because they are finished. In an overall analysis of the budget look for telltale signs.

Sales which have been profiled as a classic “hockey stick” will often put the company in trouble. Operational costs which grow faster than the underlying drivers (e.g. employees, customers, products built etc.) need further scrutiny. Administration costs which are not kept in check will ulitmately come back to haunt you. Additionally in smaller companies look carefully at your growth plans. Can you hire and equip (space, desks, computers etc.) for staff that you have planned? Objective evaluation of the plan will often point out these weaknesses.

Cast in stoneā€”a mind like water

The one thing that causes many budgets to fall into the dust bins of financial history is that they will be seen as a definitive work in the company, and be immediately shelved forever. The innocent will rid their minds of the painful effort to complete their portion of the budget and will move on to the next thing. This is the prime failure of poor budget management.

Budgets should, and must be dynamic efforts. At least monthly, budgets should be evaluated against the actual income and expenditures of the business. Course corrections should be made, assumptions confirmed, or changed, and the cycle continues.

Everyone in the company who is responsible to contribute to the control of the budget must have a direct insight into the effect they have on achieving the budget goals. No one in the business should ever forget that there is a budget. Reminding them that the commitment to achieve the strategic goals of the business as measure against a budget is the work of all leaders.

Summary

Budgets are the financial model of business objectives and corporate achievement. They must be seen as a tool to keep you on track and focused on the main strategic goals. They are not the end in themselves but rather a portrayal of the milestones along the journey we call business. Used properly they can vault you to success in a predictable manageable manner.

Send this article to:
  • Digg
  • del.icio.us
  • Facebook
  • Tumblr
  • Google
  • StumbleUpon
  • Technorati
  • E-mail this story to a friend!
  • Print this article!

One Comment

  1. Budget your way to success | Shulist Group Inc.:

    [...] are ways to make this difficult but necessary effort at least a bit more palatable. We’ve commented before about budget preparation and this contribution is going to focus on some ways to assist you in [...]

Leave a comment