I would like to share my views on the awesome beauty and power of a properly managed budget process and the value creating potential inherent in this much misaligned core organizational process.
Around this time of year, most organizations are wrapping up the past year-end results and finalizing their plans for the coming New Year. This is typically accomplished using the dreaded budget vehicle. I say “dreaded”, because far too many key employees view budgets – as a pain – an accounting exercise that is difficult to relate to, while delivering little value.
Budgets have unfortunately garnered a bad reputation over the years. Not because of their nature, but rather how they are internally managed. A poorly managed budget process will result in a silo process with poor organizational integration, internal misunderstanding and diminished importance.
Budgets are, in fact, one of management’s most important tools, especially if they are managed properly. For example, a well-managed Planning/Budgeting process can yield clarity of purpose, define accountability, and provide a benchmark for performance measurement. An old boss of mine used to always say, “What you don’t measure, you can’t improve”. This is so true in business, as well as with sports and in other life endeavors.
Although most businesses prepare an annual budget; very few do budgeting well. Budgeting real value is not the end product. This is just a piece of paper or organized digital numbers. The real power and value proposition of budgeting is in the process.
The annual budget process of jointly setting clear objects helps to communicate to the entire enterprise future expectations and vision. It also establishes priorities and streamlines decision making throughout the year.
The simple but powerful process of having the organization come together to debate and think through the coming year adds value and a sense of community. First, sharing what needs to be accomplished and then agreeing to it as a group. Next is the vigorous bonding process of deciding just how it will be accomplished.
The process does not end with the creation of a budget. It is a living document that should be used monthly to examine and compare the real results to the desired results (the budget). The organization should establish monthly performance meetings with key decision makers to review how the company is doing, what is working well, what is not working well, what needs to change, and what do we need to work harder at.
Below I have listed five reasons why every organization should embrace a budgeting/planning process.
- Creates a Roadmap
- Provides a Forum for Decision Making
- Increases Control
- Clarifies Expectations
- Measures Progress
In summary, a well-managed budget process will improve business results. The budget keeps score on the businesses annual goals. But the real power of the budget is its underlying communication properties and its on-going goal focusing properties. Plus, it is a valuable external tool for communicating with other key constituents: like banks, lenders, directors, investors or clients.