Does Your Budgeting Process Add Value?
Hello, I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with me by exploring topics that span leadership, business management, education, and other musings designed to support your journey of personal and professional continuous improvement.
The creation of the annual budget is one of the biggest cross-functional projects your company will undertake. The process is so large and onerous that some refer to it as “budget season.” If budgeting is really a fifth “season,” we should be working hard to ensure the process adds significant value to the business, its people, and its customers.
For many companies, this season starts in August (assuming that the fiscal and calendar years are aligned), but I’m musing about budgeting now to raise awareness of challenges that typically infect the process in hopes that you can make a difference in your company’s process this year.
Optimally, your company’s budget should be an elegant financial expression of a tight, cohesive storyline that explains how tactics and execution in the upcoming year align with the company’s purpose, long-term vision, and master (or top level) goals.
Unfortunately, the storyline and strategy often end up taking a backseat to the numbers, and most participants in the budgeting process—from senior leaders to individual contributors—view this “season” with dread and look at the whole thing as perfunctory drudgery. I’d like to change that narrative.
Why Does Budgeting Get Such a Bad Rap?
In practice, budgeting often devolves into a numbers game to meet specific financial targets that have been handed down from the c-suite. With no underlying support from the data or current state operational cadence, the CEO and/or CFO look at the previous year’s results, lick their thumbs, wave them in the air and say: “yea, we did $40 million in operating income last year, we should be able to grow to $45 million this year. What do you think? Minions, go make that happen.” The reality of revenue run rates, customer acquisition cycles, new product launch delays, resource constraints, and investment spending to maintain the current state are ignored and the magical thinking of senior leadership ends up driving the process.
To make matters worse, most of the heavy lifting to create the annual budget is done by middle management. On the surface, this shouldn’t be an issue, but these team members are typically not fully plugged into the overarching corporate strategy. They likely know their area of the business well, but lack a clear understanding of how their activities support the business as a whole and the cross-functional teams they interact with along the value stream.
Moreover, the budget process is often led by finance and accounting professionals who are focused on meeting tight deadlines and rolling up spreadsheets. It’s not necessarily their job to ensure that budget outputs are aligned with the company’s purpose, vision, and master goals. Add in senior leadership magical thinking and egos, and you end up with an unrealistic, potentially demoralizing budget that’s under water on January 1st.
How to Build Better Budgets
Here are some questions for senior leaders and functional area managers that may help drive better results:
Has senior leadership set expectations regarding the budget process? Is senior leadership looking for input from their functional area leaders to create a realistic, achievable budget, or do they have an aspirational “stretch goal” in mind? If the goal is indeed to hit a specific aspirational financial target, let everyone know your intentions. Don’t make everyone go through the motions of creating a bottom-up budget only to toss the whole thing in the garbage.
Are the corporate purpose, vision, and master goals clear, understandable, and consumable to stakeholders up, down, and across the organization? Does everyone possess the business acumen necessary to understand how value flows through the organization to the customer? Do team members live their lives in silos or do they have a solid baseline knowledge of what everyone else is up to and how other departments add value along the value stream?
Is everyone aligned with the corporate purpose, vision, and master (high level) goals? Is there lingering tension between senior functional leaders? Engaging in constructive conflict is key to ensure that as many doubts and hidden agendas are eliminated.
Blindly moving through the motions of budgeting can be one of the biggest wastes a company will generate and a big contributor to employee dissatisfaction.
Done well, the budget can become the roadmap to significant progress toward your company’s long-term vision and a tool that helps build teams and organizational trust.
Make your budget season matter by doubling down on creating the organizational clarity needed to ensure everyone is rowing in the same direction. Use it as an opportunity to strengthen storytelling skills and team cohesion at all levels of the company.
Have a great weekend as you recharge for the week ahead.
