Use Your Budget Process As A Strategic Tool, Not As A Way To Haggle With Your Management Team.
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Some corporation do a fantastic job with strategic planning and execution. Amazon is a great example of a company that was able to retain focus and push strategic initiatives even in the face of adversity. However, many others, struggle with the process to define and execute a strategy.
Not only strategic planning fails most of the time, but the implementation and measurement of the strategy do fail as well.
Take the corporate budget process for example, where, in many companies, the majority of the time is spent on tactical details of aggregating bottoms up data and consolidating numbers on a continued one-sided, back and forth, negotiation between the field and the executive team.
An exercise in futility where the goal is to agree on a number, but not the plan on how to achieve that number. An exercise that takes several months, exhausts sales, operations and corporate resources, adds little value, with FP&A, sales and operations teams spending a significant amount of time making tactical adjustment to endless spreadsheets.
This, as opposed to using the budget as a true planning tool to understand the current state of the business, build a true base case scenario, prepare for challenges and potential opportunities, analyze strategy considerations and understand what realistic actions are required and/or available to achieve the desired goal. Understanding organic growth, market pressures and opportunities, the impact of acquisitions and divestitures, capital spending allocations, market penetration and customer acquisition strategies, shifts in regulations and customer preferences, incentive compensation, changes in the economy and expected growth, cost pressures, among other things.
If you are in a leadership role, these discussions will not only align your team around a strategy but give you true insight into your market and your customers as well as foster a culture of honesty and genuine collaboration between you and the management team. Important issues will not be hidden but will rise quickly so you can make timely tactical changes to achieve the strategic objectives.
It is never as easy as slap a 10% growth rate over last year’s numbers and call it a day. It can be truly painful to build and manage a strategy and have a successful budget process, especially if part of the challenge is to change a culture that is not accustomed to that level of discussion.
If your base scenario shows that revenue next year will be $80,000,000 for example, but you want to achieve $100,000,000. You can either use your budget process to identify the actions that can get you there and prepare the initiatives to bridge the gap; reduce the budget to the base scenario number; or pretend that you are in a Nike commercial and tell your team to just do it.
The issue with the just do it approach is that even if you have the best managers, the actions each one will take to achieve the budget will be based on the short-term individual goals needed to achieve “the budget” and not grounded on a central corporate strategy. For example, one manager might be able to sacrifice margins for revenue, another might decide that selling a current product as opposed to push for the new generation product that corporate sees as the future of the company is the way to go since it would be easier for the sales team and require less short-term resources. In this scenario, due to extra human effort and “creativity” of the management team, the company might actually achieve “the budget” for the year, but it might be at the expense of the long term success of the company, it would have not pushed the company closer to achieve its long term strategic goals, it will have added unnecessary stress on the teams, and may compromise the company’s future competitive position.
And, as scary as that sounds, this could the best-case scenario. A scariest proposition is for the delivery team to know the budget is unattainable but agree anyways in fear of losing their jobs for not being a team player and agree to get it done. This creates a gap in both trust and expectation between the executive and management teams. The management team focus is now survival and not strategic. They would shift the gap in the budget to the last quarter of the year in hopes of a miracle. The company would seem on route to meet the budget but fails when the last quarter miracle does not materialize. The Executive team and board are blindsided by the miss and blames the management team for not being proactive and alert them of the issues. Everybody loses.
The budget process should be a tool in the execution of the strategic plan. It should be a stretch goal, but not a guess. It should contain initiatives and contingencies that can be measured and reported on. Quarterly discussions should be grounded on achieving the budget by executing the strategy and not a series of anecdotal events and discussion of line item variance analysis.
As much as strategy, strategy planning, and budgeting are discussed, it still seems as something treated as a “must do” as opposed to value tools to align, organize, direct, measure, incentive and grow the organization. And that’s why in many cases strategic planning initiatives fail and many managers do not look forward to the budget process.