The sense and nonsense of budgeting
Oct 14, 2020
When I talk to CEOs and division heads (for example, in my coaching sessions), I sometimes have the impression that the budgeting process eats up too much of their time and energy, typically in the fall. As a former large company divisional controller, I can tell you a thing or two about it (and I see the same tendency in medium-sized companies, too).
The problem is that budgeting is 100% unproductive when measured against the company's purpose (mission) and vision (because hardly any company will make "outstanding budgeting" part of its mission or vision).
In other words, managers - and usually many other people involved - are working on something that is a "waste" in the traditional sense. In addition, the budgeting process often replaces strategy discussion. Not only do we then not have a strong business strategy, but also high opportunity costs.
Why does something like this happen? In my experience, there are three main reasons. In the following, I also share what you can do about it:
- Uncertainty about the meaning of strategy. I come across this surprisingly often: Many managers have little clarity about what strategy exactly is and how to develop it most effectively. As a result, enormous business potential is left untapped. My tip: Find out more about strategy creation from books, other forms of learning and also a sparring partner or coach.
- The budget process takes on a life of its own. I observe, again and again, that the budgeting process, which is necessary in principle, is becoming more and more extensive, gradually tying up enormous capacities. The problem: Budgeting almost always starts with a continuation and further development of the status quo; i.e. exactly the opposite of a good strategy (which is developed from the end backwards). My tip: First strategy, then budget. And then the budget as lean as possible.
- Perceived security. Let us not delude ourselves: Clean budgeting suggests certainty about the coming financial year - provided that no major changes in the general conditions occur. And this is increasingly becoming an illusion. There will always be more "unforeseeable" events than we would like. And the trend is growing. The result will be, for example, that despite declining sales, no investment will be made in sales training - because it is not in the budget. Or that despite a threateningly bad mood in the team, no targeted work is done to improve the situation - because it had not been budgeted for (these are real examples).
Conclusion: In most companies, there are various “pot holes" in which resources are sunk - often with limited, and sometimes even negative, effects. I'd be happy to take a look at this together with you. Just get in touch with me.