“It's budgeting season and we have to figure out how to achieve our priorities with 30 percent less resources.”
This is a story I recently heard from a C-level executive. She leads a globally significant business function at a complex $1.5 billion company. Upon further investigation, she discovered that the cost-cutting mandate was not due to poor performance; in fact, performance was strong. And her department's work is viewed as critical to the organization's success in managing expected growth. Unfortunately, this executive's situation is not uncommon. As the traditional “budget season” begins, CEOs and CFOs may want to consider the following:
• Often budgeting is limited to calculating plus or minus percentages.
As with my C-Suite clients, leaders are instructed to create budgets that allow for specific reductions or increases compared to prior year spending. Certainly, careful attention to costs is important. But blindly following percentage changes will disconnect investments from intended outcomes. While forecasting based on percentages may be convenient, it does little to increase clarity.
When budgeting is reduced to a plus-minus percentage exercise, “budgeting season” becomes a trap. No wonder people dread it.
• Budgeting is always imperfect.
A budget projects future expenses and revenues based on experience and what we currently know. Budgeting is always imperfect because we can't predict the future. We can make reasonable assumptions about well-known uncertainties such as the economy, political and regulatory changes, throughput, inventory, and forecast potential opportunities. But something will always be missing or wrong.
As the year progresses, leaders learn. Circumstances change. Investments drive progress or fail to pay off. Competitors and customers make unexpected decisions. All of this shapes behavior and affects the numbers.
• Turn your budget into a strategic tool.
For strategy to work effectively, it needs to be aligned with operations. A strategic budget does just that. It aligns resources and investments with what matters most to achieving goals. Plus, the budget is highly visible across the organization. By turning the budget into a strategic tool, the CEO helps everyone understand the relationship between resources and intended outcomes.
Strategic budgets also become a more effective tool for ongoing management. When uncertainty is particularly high, smart CFOs create multiple budgets at the beginning of the year, highlighting how changes in key business levers can mitigate risk or create advantage. (See: A single budget is not enough) Throughout the year, CEOs elevate the conversation around actual versus budgeted performance and reconnect investments to strategic actions. Both activities make it easier to quickly and effectively reallocate resources as conditions change.
• Strategic budgeting keeps everyone in sight.
In this way, the budget is no longer a season or a trap, but an opportunity. A strategic budget lines everyone's eyes on the impact that certain actions will have on the success of the strategy. The executives I advise review the strategic impact of their budgets at least three times a year. They ask:
- What do actual revenues tell you about how your customers and competitors are reacting to your products and services?
- To what extent do current resource allocations and investments promote or hinder growth?
- What changes need to be made and by when to course correct, maintain momentum, and accelerate progress?
• Stop moving numbers around on spreadsheets.
A plus-minus percentage approach does little to strengthen your strategy, so stop moving numbers around on spreadsheets. It's time to change the way leaders think about budgets. Link budgets directly and clearly to the decisions and actions that are most likely to achieve your vision.
CEOs and CFOs who embrace budgeting as a strategic tool and process unlock the potential to accelerate performance throughout the year.
