The Great Dysfunctional Budget Process

I took the inspiration of this article from one of my favorite bloggers, Dave Kellogg, who as a former CEO has an amazing grasp of both the strategic and everyday challenges of running a successful business.

I’d encourage you to read Dave’s blog post of the same name, but let me highlight a key point he makes and where I’d like to focus this post.

It ends up a budgeting, not a planning, exercise. What’s supposed to be a planning process that includes generating a budget as one part ends up as a budgeting-only exercise. In marketing, I call this the “buckets of money” problem. Which tradeshows have we decided to do based on what strategic criteria??Dunno, but I have $500K allocated to tradeshows next year.?Which analysts??Dunno, but I have $250K allocated.?What are our key themes??Dunno, but we can figure that out later.?All those questions should be answered in the marketing planning process, but they get lost in budget-myopia.

Budgeting is about allocating resources. In a very real way the company is laying down its bets to fund more of this and less of that. If those decisions are right, they’ll pay off with improved performance. If those decisions are wrong, the company will suffer and people may lose their jobs. It amazes me that with those stakes involved many companies shortchange the whole planning process and spend the bulk of their time filling in budget templates, consolidating them, presenting (and debating) the results.

Budgets should be the outcome of strategic decisions, not prolonged negotiations.

The best run companies establish business targets first (a whole subject in itself), then decide how they will achieve them. Not with platitudes and glib promises but with well thought out Initiatives that translate into discrete projects and activities (with owners, milestones, and due dates). The funding required to deliver that strategy is what gets budgeted.

In many companies; however, it just doesn’t work that way. If you followed people around with a video camera during the annual planning process, you’d find them negotiating down Revenue targets while negotiating up their spending (granted this would make for boring TikTok). The point is you’d see little time, comparatively speaking, developing or discussing real plans for making business goals happen. As David put it:

“I drone on endlessly on the difference between planning and budgeting. I try to find buckets of money (or buckets of people) and blow them up, asking for supporting detail. So, we have $250K for tradeshows — which ones and why? So, we want to hire X sales people — what will their territories be? If you don’t know, you have a budget, not a plan. I want both.”

A classic example would be a company that wants to improve profitability by reducing manufacturing costs which will require delivering an improvement in worker productivity. An investment in training or new equipment may be required, and it’s that investment that winds up funded in the budget. The conversation in the annual planning (a.k.a. budgeting) process should be focused on the training program or the implementation of the new equipment and connecting the dots between that investment and the expected results.

Chances are you don’t see a lot of that today.

One reason why is that most FP&A systems do a poor job of accommodating initiatives or project spending -- they’re almost exclusively focused on general ledger accounts and the P&L. The result is even if you wanted to move beyond budgeting to real business planning, you’d have to do a lot “offline” in a spreadsheet, which raises a whole slew of problems.

Ultimately you need a platform that can address both the finance department and operations (including Marketing, Human Resources, etc.). Furthermore, you’d need to rethink the process itself. A great “how to” source is the IMA’s 12 Principles of Best Practice FP&A.

The takeaway here is that Planning is NOT the same as Budgeting, and in fact the Budget should be derived from the Plan.

So don’t look to improve budgeting, look to start Planning.