Your budget is wrong, and that’s okay
This article is sponsored by Jedox. Jedox is the world's most adaptable planning and performance management platform. They help companies succeed with integrated business planning (IBP). We'll be talking a lot more about planning when unveiling our latest eBook "The Planning & Forecasting Blueprint" together with Jedox on a webinar on 14 December. Join the 9 AM CET session here and the 4 PM CET session here.
We’re fast approaching the end of this year’s budget season. Board approvals are expected to happen in the coming weeks and then it’s a wrap. Here’s a sad fact though. Your budget is wrong. No matter how hard you work and how good you are at forecasting you won’t be hitting those numbers next year. Or even worse. You will hit the numbers because teams manage them so tightly that they’ll make the numbers fit.
I don’t want to take away your spirit from the work you’ve done the past two or three months. However, I do want you to shift your perspective on this work. The purpose of the budget is not to hit next year’s number accurately. Rather it’s to ensure to facilitate the right discussions with business leaders and inspire accountability for doing their best to deliver the expected results.
It’s also important to shift the discussion from the number to how to make a desirable future happen. Budgeting should be rooted in strategy which should be rooted in the mission and vision of the company. If you fail to deliver the budget continuously, you’ll by logic also fail to deliver everything else. Hence, your budget process should be an exercise in charting the course to a successful strategic future. If leaders want to negotiate any less, it’s no good.
Actual vs. Budget. Is it still relevant?
Given that the focus shouldn’t be on the number and that it’s anyway going to be wrong it may seem counterintuitive that we still make an actual vs. budget comparison. Again, the purpose is not to beat business leaders up for not hitting the numbers. Rather, it’s to discuss which budget assumptions were wrong (so we can learn) and what we should do instead to get back on track.
Here’s the thing. The whole budget is an accountability cycle. Not hitting the exact number though but to progress the company toward realizing its strategy. Unfortunately, many finance professionals treat it as an accountability cycle towards hitting a number. They would make a budget and forecast accuracy KPIs the holy grail much to the detriment of business leaders’ faith in finance’s ability to help them win.
It should result in a simple principle for the budget process and the follow-up.
“Learn from inaccuracy so you can act on it and perform better in the future”
This figures to be a much different mantra than that which finance professionals have been living by since the dawn of time. And it’s about time we changed. The world is more volatile than ever making it increasingly impossible to hit a specific number. As highlighted you should almost be suspicious if someone hits the budget number accurately.
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Embrace uncertainty
Imagine you delivered 80% of your budget number. You could impossibly be happy about it. I’m not saying you should but given the circumstances, 80% could be an amazing performance (as well as it could be just terrible). What’s important is that you don’t punish business leaders for not hitting the number. You can punish them for not acting on underperformance or changing market conditions.
It’s not what number they hit but how they react as soon as they see they’re not hitting the number. It could be a similar discussion if you were 125% to budget. Don’t reward business leaders for overperformance. Reward them for striving to do even better and constantly pushing for better performance. As soon as they become complacent you’ve already lost.
It’s impossible that your budget number will be right and that’s okay. We know it will be wrong. We just don’t know by how much. Knowing this you should embrace the uncertainty and instead facilitate a process where you assist business leaders in making proper action plans when the numbers differ from the forecasted path. It’s time to make peace with not hitting the budget number. Are you ready for that?
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Anders Liu-Lindberg is the co-founder and a partner at Business Partnering Institute and the owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 11,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner” and a long-time Finance Blogger on LinkedIn with 305,000+ followers and more than 265,000 subscribers to my blog. I am also an advisory board member at Born Capital where I help identify and grow the next big thing in #CFOTech. Finally, I'm a member of the board of directors at PACE - Profitability Analytics Center of Excellence where I support the development of new analytics frameworks that can improve profitability in companies around the world.
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1yLots of good points there Anders Liu-Lindberg. However, I have to disagree with much of it. In most cases the budget will be derived from the strategic direction that the company wants to go in as approved by the shareholders and adopted by the board. The budget will therefore reflect the strategy and direction/map for the business in financial terms. A budget is quite simply a series of assumptions whether one, one hundred or more. At the point of creation these assumptions should be the best available and based on where the business is and where it has been. Therefore when prepared it should be correct – not as you say wrong. Those assumptions are likely to change so the budget may indeed be wrong on the next day and at points going forward – more accurately different rather than wrong. CONTINUED BELOW
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1yThis integrated business planning is interesting.
Director Sales Strategy | €37B portfolio pipeline | Want Fast & Efficient Sales Growth? Turnkey revenue system will transform YOUR business development team's effectiveness / GTM productivity | EMEA Scale-up Advisor
1ysuch an important point: budgeting is not merely about allocating resources , it is about securing a desired future, not just arbitrarily making the numbers work - that is not the goal!
Finance Professional
1yThis is both sobering and inspiring at the same time; using the budget as a tool not a yardstick.
Helping Finance Managers of ‘busy’ SMEs improve profits | Turnaround 'busy' loss-makers | Improve profits of the already profitable | A proven step-by-step process | 90-day projects | Training & Coaching throughout |
1yThe very fact that it's done in advance - based on all sorts of calculations and assumptions - and we live in a real world - where change happens - means your budget is not going to be "right". But is it misleading, is it demotivating or demoralising, is it simply a 'wish list' - or is it instructional (if we want to achieve 'that' - then this is what we've got to do / that's what's got to happen - to get there.