Why should the budget take the fun out of money?

Luther Gulick explained it well (*): there are seven functions in management and the last but not least is the budget. Management is responsible for budgeting. So let’s get to work, but first let’s ask the right questions.

The questions to ask yourself

The Corona pandemic has highlighted the fact that unforeseen events can have a considerable influence on the course of business. Budgetary plans need to be adapted. However, many other events are foreseeable or can be anticipated, so their effects on the business can be taken into account in budget planning. So think about different budget scenarios. Other considerations to be taken into account when drawing up the budget are:

• Where do I come from? What are the objectives? What do I want to change?
• Where can savings be made? Answer this question without losing sight of the goals and direction of your business objectives.
• What machines, vehicles, IT infrastructure do I need to renew? Do not plan these expenses as depreciation, as in accounting, but as concrete expenses of the respective purchase prices.
• Where can additional costs be incurred? Are there additional risks such as old infrastructure, obsolete technology or similar?
• Regarding business growth: where and how can I generate new customers? Should I expect to lose existing customers? And what are my acquisition costs to break even?
• Is my forecast estimate correct? Is it realistic to deduct my own market share from the overall market volume? A conservative estimate avoids unpleasant surprises, and should be set according to objectives and strategy.

Once these questions have been answered and the answers documented, they provide a framework but still no budget. The next step is to check whether the budget assumptions are in line with the company’s strategy.

Staying in line with the company’s objectives

When creating a budget, the manager must always bear in mind the company’s main lines of development. His or her budgetary choices must therefore be in line with the major orientations of the various departments in order to fit in with the company’s overall strategy.
The implementation of the company’s strategy at departmental level and therefore the validity of the department’s action in support of the overall strategy is one of the keys to the acceptance of the budget by the hierarchy.
Finally, in order to be credible and to face all negotiations with the hierarchy or controlling staff, the manager must be up to date with the figures for his or her department or service. He or she must also be familiar with past figures in order to take account of changes when drawing up new forecasts. At the same time, the manager must monitor the differences between past objectives and future expenditure. Indeed, the time line is important for the budget.

Budget time

There is a time for everything. If the budget is drawn up too early in the year, it does not allow for reflection on current actions and the validity of the budget drawn up at the end of the previous year; if it is drawn up too late in the year – between November and December – the budget will be framed by expenditure and projects that have already been committed, and will not allow for a start to the year marked by the new orientations of the budget. Too early, the budget will be undermined by uncertainty, too late, the budget will be walled in by certainties.
Similarly, the budget must be linked to an action plan. A management controller recently said to me « I have a clear cost reduction framework and departmental budgets must reflect this. The question of « when » this money will be spent is not my problem ». No, you need an action plan to be able to check but also to react or even adapt or modify the budget along the way. COVID has shown us, if this was not clear enough in the past, that the company must be reactive, if not ahead of the exogenous effects. If there is no action plan and a timeline, then it is not a budget, it is a pocket money allocation.
A budget forecast cannot be effective if it does not lead to an established action plan. You must therefore determine the objectives to be achieved, the means to be deployed and the resources to be mobilised. As a good manager, you must also be able to see through the figures to consider all possible scenarios.

Find the fun out of budget

The budget, once established and accepted by the hierarchy, is just as sexy as a blank check. The manager has a timeline, an action plan and the resources to achieve the objectives he has set. The fun is not in spending the budget but in turning a budget into a profitable economic reality. The budget does not take the fun out of money, the budget finds the fun in the strategy.

(*): Luther Gulick’s theory, POSDCORB, entails seven key functions of the management: planning, organising, staffing, directing, coordinating, reporting, and budgeting.

If you too would like to know more about how to setup your company’s budget, feel free to contact Copper Oak.