24 Sep

Strategy first, budget second

In my first post on budgeting I listed ten key points to consider when setting out your budgeting process. I know from personal experience that a lot of staff in many companies view a budget as a bother rather than as a useful tool. If this is a problem in your company, it needs to change or it becomes corrosive and demotivating.

A budget should be simply a financial picture of something much more important, and that is the company’s strategy. The goals and objectives planned for the next one or two years will determine how the business is expected to perform. The budget – or forecast – should reflect the anticipated revenue streams and the resource costs that flow from these plans.

It follows therefore that budgeting should be a dynamic and motivating process because it is a core part of enabling your strategy; it is actually an opportunity for showing strategic leadership throughout the entire organization. It is essential therefore that the process involves as many people as possible, and that decision-making is bottom up as well as top down.

The need to demonstrate leadership, and show that the budget is just one part of the overall implementation of your strategy is why a budget should never be the ‘main thing’ where it takes on a life of its own. In too many companies, the budget becomes a straightjacket, where managers are afraid to ‘go over’ their budgeted expenses, or feel they must chase budgeted sales at all costs. Initiative can be stifled and in such an environment it’s all too easy to become internally focused and blind to what’s actually happening in your market.

The better approach is to involve people throughout the company in the overall strategy process so that everyone is motivated to develop a meaningful budget because they will each have responsibility for their own inputs and results. Have an open culture that encourages initiative because employees are assessed on delivery of goals rather than meeting numbers.

Such a process is obviously more challenging than one which typically revolves around the finance department sending out a bunch of spreadsheets that require completion by different departments. Instead, allow managers really think about how they can contribute to the strategy, which means that they have to really understand that strategy. So the first requirement is good discussion and communication of goals and objectives.

In the next blog post we will look at ways in which strategic budgeting can be rolled out across the company in more effective ways, for example by using measures of performance other than the purely financial numbers in the budget. For example: customer service, staff productivity, competitor pricing, delivery times, product quality, complaints – all measures that give you a much bigger picture of real performance.