Following are 5 fundamental factors to consider as you plan for the budgeting process, and allocate the resources necessary to deliver strategically significant outcomes, as well as, ‘the numbers’.
Parentage.
Ensure the budgeting process is a child of the strategic priorities, and measures of progress towards the stated strategic objectives. If these strategic priorities are not clear, budgeting in the absence of strategy is like having a shower with a raincoat on, you will have done the process, but it will not do much good.
Rolling budget.
Make the budget a rolling document, reporting against the expectations articulated in the budget, and updated quarterly. For many, month reporting is standard, but mostly it is financial only, make it strategic as well. However, monthly is too small a time frame against which to reliably measure for strategic progress, quarterly is preferable. This rolling process should not be just for the budget year, they should be rolling quarters, and perhaps more than 4 of them. Strategies should not change dramatically in the absence of some significant and unexpected external catalyst. What changes, are the tactics used to achieve the strategic objectives, and both must be measured. I have used a 5 quarter rolling ‘budget’ in the past. This time frame is long enough to enable a continuous process of critical thinking that becomes part of the routine performance management processes. It has the added psychological benefit that it is not 4 quarters, that are too easily seen as a proxy for an annual budget.
Zero based budget
Make the process zero based, or at least partly so. Do the critical analysis of what is required to deliver the long term. Which markets and customers should you be servicing, what capabilities do you need, which improvement activities do you prioritise, which investments make most sense, what tactical activities should we be doing, and so on. Then then cost it, while making forecasts of the tactical outcomes and longer term benefits derived from the various activities. Taking last years numbers and adding 3% is again getting under the shower with that rain coat on.
Zero based budgeting demands that assumptions be examined and validated before they are included in the numbers and forecasts. It is a means of testing the boundaries of the status quo, and enabling some extrapolations to be done, and strategically sound experiments to be undertaken, so forecasting can be based on data and experience rather than what one person thinks may be a good idea. It also demands cross functional buy in, particularly when improvements are being sought. Functional siloes usually get in the way of improvements, by focussing on their own patch, and not recognising the cross functional nature of processes.
It also requires an analytical approach to decision making in the place of the often qualitative approach used when you just bung on 3%.
Deploy Data.
Data is essential, no sensible budgeting effort can get away from the need to have quality data and depth of thought created by critical examination of the data. Internal data is essential, and as important, but usually just glossed over, is external and competitive data. While I always advise clients to worry about themselves rather than their competition, that does not detract from the simple fact that competitors do have an impact on performance, so being able to quantify that impact is of great value.
Do not trust the Status Quo.
In every organisation, the status quo exerts a great deal of pressure. Doing what has been done before, even if it is sub-optima, will rarely get you into trouble, but it does ensure at best average performance outcomes. The status quo will override any effort that is not supported by both critical thinking, creative solutions to well articulated challenges, and data. The automatic continuation of the status quo is always a sign of sloppy or absent thinking.
Happy budgeting, and if you need some experienced guidance, give me a call, today.
