Each year we go through the draining process of pulling together the budget for the next financial year. Most managers loathe this process and for good reason. After co-coordinating the budget process a number of times in large businesses here are a couple of things I have learnt along the way.
- Finance should not own the budget. It is a line manager responsibility that is also driven by them
- Lots of time needs to be spent up front aligning on the expectations, assumptions and parameters of the budget. Do upfront modelling to understand what the target spend and cash flow position looks like. Socialise this with line managers and get buy in on the bigger picture and what the end result should look. Set clear expectations about cost efficiencies and savings targets, and be clear up front as to what the priorities. Don’t waste peoples time putting together a bottom up budget if there is not widespread ownership and buy in as to what you want the end result to look like. You can’t hit a target you cannot see.
- Make the first cut of the budget an 80:20. So much energy gets spent coming up with a perfect budget well before the chiefs get a chance to see what it looks like. Often they don’t like what they see and you spend a lot of energy recutting the budget again and again.
- Ensure you do quarterly re-forecasts rather than try to do everything in one big budgeting exercise. A good budget should have no surprises as there should be ongoing dialogue, re-planning and forecasting throughout the year.
- Don’t use the budget process to let people come up with new initiatives and new plans for the next year. The budget should be formalising plans that have already been agreed through the long term, annual and 90 day planning process. Set the expectation that the budget is not a wish list of what you would like to do but rather it is alignment on what it will cost to do what we have already agreed and committed to do.
- Challenge line managers to offset any cost increases with savings elsewhere. A budget shouldn’t be a grab for more resources but rather challenge your managers to prioritise a budget which is finite.
- Require a business case to support any new initiatives. This should be presented and agreed throughout the year before the budget process. The budget process should not be used to get new ideas or initiatives approved. Again ‘no surprises’.
If your budget is yielding significant cost increases each year for doing the same things, or if it is yielding lots of surprises then you probably have holes in your organisational planning processes. It indicates that either you are not setting constraints and expecting managers to be innovative and prioritise, managers don’t understand the bigger picture of your cash flow targets, managers are not connected with business outcomes. Other indicators may be that there is not a focus or understanding of the drivers of performance, or that there are not adequate process in place with your business around iterative long term planning, annual planning, 90 day plans, monthly performance reviews, or project stage gate processes.