Blog - Strategy

The Biggest Budgeting Blunder that Kills Growth

Posted by Tim Lewko on Sep 3, 2015 3:15:09 PM

Tags: Budgeting

It's budget season soon.  Many executives are dusting off the budgeting machinery and rallying the troops to create the critically important 2016 budgets.  

Is Budgeting a Blessing or a Burden for your organization? 

For those using their visible, data driven and updated strategic asssumptions about the outside world (i.e. Market Growth, Competition Moves, Technology Disrupters and Economic Cycles) they are primed to respond with meaningful ways to exploit or mitigate EXTERNAL trends for 2016 based on how and where they should compete (and not compete). 

In turn, their budgets will reflect "Street Smart" insights with "The Critical Few" factors pointing them to where their profits lie.(and having a higher confidence in achieving their comp. or bonus plans)  Their leadership team and importantly, sales team, (or Managing Directors or Market Leaders )will have provided valuable input and will buy-in to the Company GOALS (Budget numbers) they've collectively authored.

In short - they are motivated owners of their numbers because they have connected OUTSIDE to INSIDE

On the other hand ---- there are those organizations who are not looking forward budgeting this year. The genuine sweat equity by leaders and ground troops will be side-swiped again by numbers spawned too much on internal folklore rather than outside trends.  

Worse, they know when all the numbers are crunched, all the meetings for approval completed, and all spreadsheets handed in, they will have arrived at the MAGICAL 10% Growth NUMBER for 2016 Budget. (Funny, that was the same as last year they were thinking.) They have worked the budget machinery, spent all the hours and resources to create something that is purely operational and unrelated to strategic reality. 


In Short - they have committed the biggest budgeting mistake that kills profits - using only INTERNAL DATA NOT TIED to EXTERNAL DATA and ASSUMPTIONS Why does this INTERNAL ONLY method hurt?

Three reasons: 

1. AVERAGES: It Homogenizes the differences in your products and markets - those distinctions need to be sharply reflected in budgets. e.g. How can our budget(or sales targets) for SMART phones be 15% when the market is growing at 30% asked one astute sales person - the others quickly said - don't rock the budget boat.

2. UNDERMINES: It Undermines the Intelligence of those people on the Front Lines -who know there are differences in products, customers and external factors. They will set higher and more realistic goals if you get them to connect budgets to their expertise and insights of the outside world.  They don't want to dismantle the BUDGET machine but most know it does not work and takes too much effort.

3. UNICORNS CONTINUE: It continues the BUDGETING UNICORN process of setting goals based on what executive's think versus what the data is tell them.  There is and always needs to be a balance between experience, judgment and data - but too often many companies just DON'T KNOW the external data and prefer to go only with gut. And if this starts at the very top - then is will run down hill.

All three of these effects above reduce the profitability that is rightfully yours.

There are 3 immediate things you can do to avoid the BIGGEST BUDGETING BLUNDER (i.e. NOT connecting your strategy and critical few external assumptions to this year's budget.
1. LIST Out Your TOP 3-5 ASSUMPTIONS and the corresponding opportunities or threats that needs to be exploited or mitigated

2. SET EXPECTED, OPTIMISTIC and PESSIMISTIC ranges for your Budget Numbers - and make sure the rational is visible and connected for others - above and below you -  to critically test and weigh in on the validity and viability - to make refinements.

3. INVOLVE those you lead to get external data to and guide which capabilities, resources, skills and tools you need to invest in to deliver on your numbers.

The budgeting process is a critical operational element for companies but we must not neglect that it's numbers should be derived from your company's strategy.