Now You Wish You Were Beyond Your Budget

It’s not long ago that I wrote about a long journey you were about to embark on in “Don’t Tell Me You’re Still Doing Budgets?” and at this same time last year I gave you the exact same warning I will give you now in “3 Reasons Your Budget Is Already Outdated”. Your precious budget will never hold up (for good or bad). It just never will. The world always develops differently than your assumptions. However, you still decide to produce a budget every year despite at this time wishing you were already beyond your budget. I have made clear-cut recommendations in the previous posts, but you don’t want to follow them. So let’s discuss how to make the best of a bad situation.

Good, but even better if…

So, here it is how to make the most of your budget followed by an even better if you went beyond your budget.

  • It’s good that you have a budget because it provides a framework for the activities your company wants to do during the year. It would be even better if you realized that, because the reality is almost always different from your assumptions, you need to continuously evaluate what activities are the most profitable ones for your company.
  • It’s good that you have a budget because it gives you a chance to discuss with all department heads around how they see the coming year and what wishes they have for hiring, training etc. It would be even better if you realized that this was a continuous exercise where more people could be needed in certain departments due to an increased activity level whereas others might have to restrain from hiring or even let people go. If hiring an extra person makes your company more profitable it might be a good thing to do despite this FTE not being in the budget.
  • It’s good that you have a budget because you now have a forecast for the coming the year. It would be even better if you realized that the forecast is never realistic because it’s a negotiated number so you need to produce unbiased forecasts. While you’re at it why not make them rolling so you don’t bump into the annual forecasting wall in the middle of the year when there are only 6 months left of your budget and the new one still isn’t ready.
  • It’s good that you have a budget because it gives you a benchmark to explain how your business actually develops. It would be even better if you stop explaining your numbers against how you saw the world 6–9 months ago, but rather explain developments one-quarter (or even month) at a time. Rolling forecasts will make this possible and give you a chance to always catch up with an ever-changing reality.
  • It’s good that you have a budget because it gives structure to your bonus program. It would be even better if you realized that, because the world is changing and you will never be spot on or even around your budget, you need a more short-term bonus program as well as a long-term one. The short-term program will measure your ability to deliver quarter over quarter and the long-term one will measure your ability to deliver on your strategy. Just think about the harm it will do to your business when 4 months into the year it already looks impossible for most of your staff to get their bonus. So much for the motivational factor.

I could probably go on and on about this one, but I think you get the point. It’s not that your budget is useless, but there are just so many better ways to achieve the original purpose of the budget. Rolling forecasts provide a quarterly/monthly unbiased update from the business on what they expect to deliver. If you’re not happy with that you take corrective actions, but you don’t ask them to redo the forecast. Your target setting process will allow for negotiation where you agree on what short-term actions are needed to fulfill the long-term strategy. Finally, the resource allocation will ensure that you continuously evaluate all projects on their profitability (or other measures depending on what’s relevant for your company) and approve the best ones rather than the ones that made it into the budget the year before.

The first steps are quite simple, but it is a long change management journey to get this fully embedded into your company. Even if you don’t get your wish and need to stay in budgeting you should at least be critical towards its limitations. So, here we are and about to embark on 2016. I hope the best for you and your budget and let’s talk if you want some inspiration on how to go Beyond Budgeting. I also recommend you to seek inspiration from the Beyond Budgeting network. They too recommend replacing the annual budget with three separate processes addressing precisely the above, namely: target setting, forecasting and resource allocation. Practice shows that this is a great way to get started on a Beyond Budgeting journey.

Where is your company on the budgeting journey? There is no right or wrong answer and all I ask is that you’re open-minded to the positives and negatives of whichever way you have chosen.

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