If you don’t have a budget, how do you know what you are shooting for and how well you are tracking? And if they don’t have a budget, how can they (not) afford you?
What’s your Budget_ (Audio)
How good are your budgeting skills? How practiced are you? How well do you use budgets to drive your success outcomes? How well do you use it in your sales process? Is it an art or a skill?
I am pretty sure there can’t be many companies operating out there that don’t have an annual budget to drive their business targets and outcomes each month. Like setting goals and monitoring progress each month and quarter, the budget sets targets and provides the necessary stakes for keeping the organisation on track towards achieving its expected results. It forms the basis upon which most activity and performance is measured and monitored.
Given current US GAAP (Generally Accepted Accounting Principles) influenced analyst driven obsession with quarterly results, the annual budget has become almost the longest range planning we do. I remember we used to do 3 year plans and 5 year long range plans in the past, but today those only seem to be done at a very macro level, if at all.
The business budget
I remember how much energy we used to have to invest in the annual budget in my corporate life. Towards the end we started a budget almost 5 months before the end of a financial year. My frustration with that was the level of depth and detail that it required and that by the time we got to reporting against the first month, almost half a year later a lot of the base assumptions may already have changed.
In today’s competitive business world the budget provides the basis upon which particularly senior executives’ bonus or profit share incentive remuneration is based. Hence meeting, exceeding or falling short of budget has dire economic repercussions for the individuals involved, often known to drive some pretty extraordinary political behaviour.
This sometimes results in not only “micro level“ detail budgeting but also inordinate amounts of “top down” budget directives being “enforced”. To me “bottom up” or “zero based” budgeting is important, taking the top down parameters (like inflation, currency fluctuation, share price, the market etc) into account and then applying one’s own domain experience to reflect as robust and “realistic” an outlook in that budget.
Don’t you hate it when you have done so and the budget you so painstakingly created “comes back from the mountain” with the directive to cut it by 8% because it is not affordable? I remember as a junior how I used to be so frustrated at all the energy I had invested, when they could have simply told me what the target number had to be and we would have all saved so much time and effort. I sense some of you nodding your head. Can you relate?
However, budgeting is a dance. To me it is no different to any negotiation, where we have opening positions, envisaged closing positions and a bunch of likely scenarios between those two positions that we will strive to maximize in our favour.
The boss(es) will drive revenue and profit up as much as they can and drive overheads and investment down as much as they can.
Their managers will manoeuvre their positions as best they can to leave some room for the unexpected, so that they will still be able to meet or exceed their targets in case of any “surprises”.
Both will try and get away with “as much as necessary, but as little as possible”. I remember that in the years I got paid the best bonuses, it was often when I was able to get away with an overly conservative budget. And so we learn to play this game so that we become adept at this dance. My recommendation is to learn from each one and to remind ourselves of the longer term, namely that whilst in some years there will be more “downs”, in other years there will be more “ups”.
I have learned that to maintain visibility and credibility, clearly outlining the assumptions underlying your thinking and planning is most important when it comes to “please explain” variances to the actuals reported against that budget later.
This has become a very visible part of any business planning and reporting. While the budget is “cast in concrete”, the forecast becomes a rolling fine-tuning exercise of the anticipated end of year outcomes. This is where usually in each quarter we look forward to what we expect the end of year position to be. With business and stock market analysts’ obsession with predictability and the notion of “no surprises”, forcasting has gained significantly in importance.
Everyone adept at budgeting and forcasting today will remember back to when we were “rookies”, right? When it was unfamiliar and we were afraid to make mistakes and “look like a dill”.
I have always found it useful to look at the perspectives of “working into the “less known” by leveraging the “more known”. For those newer to this skill, by that I mean that the first plan coming off a “zero base” is a starting point, and is refined and improved each quarter based on what we will have learned from the actual quarter just passed. Of course that forecast is still reasonably “rubbery”. That’s normal.
The next quarter is already based on 2 quarters of “more known” and only 2 quarters of “less known”. And so if we roll this perpetually over 12 months, we will always build our planning on a growing base of “more known” and gain confidence from that for our overall planning skill. I like to think of it as a learning process, not something to be afraid of. After a couple plans and a couple years this becomes second nature, just like all those other things we are really good at today.
I know that many small businesses don’t do a formal annual budget, often to their detriment. How can you know what you are shooting for when you don’t know what the target is? However budgeting requires effort that many small business people don’t enjoy and so they prefer to invest that time in marketing or other “more important” activities. I know that accountants get very frustrated at the lack of planning, budgeting, monitoring and reporting that occurs in most small businesses.
If you are in a small business, how does yours rate on that front? Guilty?
And isn’t it even more remarkable how few households actually have and work with a budget? Even the most seasoned business managers who have very sophisticated budgets in their businesses often don’t bother with a budget at home. In my blog It’s not what you make – it’s what you keep I also speak of the part frugality, saving and discipline play in any financial success.
To a greater or lesser extent we are all “sales people”. Whether it is selling or promoting an idea or selling a product or service we are often selling, aren’t we? I have learned in the selling of my coaching services how important it can be to ask your prospect “what’s your budget for these kinds of services?”
If they do have a budget, and are willing to share its dimensions with me, it may assist me in determining my pricing.
If they don’t have a budget for it, I may be wasting my time. Alternatively, I may see them not having a budget as an opportunity to help them find other smarter ways of funding that they hadn’t thought about, thereby helping them find ways to avail themselves of the benefits of what they would like to buy, even without a budget.
I have found this is often forgotten in the sales process, and can lead to missing a great opportunity.
So what have we learned in this quick “refresher” on the topic of budgeting? Hopefully that like setting a goal that a budget can help you drive and exceed the success expectations you have of a certain period of activity. That there is an art to budgeting and forcasting and that it is a dance that requires twists and turns to manoeuvre it successfully to the desired personal and public outcomes.
If you have never done a budget, what if you decided to have a go and learn the ropes and to help you improve your outcomes? Coaches and mentors can help you here. It is a skill we need to teach many a professional in their transition into business leadership.
What if you are already experienced at budgeting but have perhaps allowed its importance to lapse? What if you picked up on it again and it enabled you to achieve another few additional points of growth for you?
What if you are expert at budgeting and you chose to start teaching, grooming and mentoring some of your subordinates so as to grow some additional competence capacity that you can delegate to so that you can dedicate more personal time to what you love to do best
What if you could?