Budgets are not Plans
Theme: Budgets are not Plans
Every year towards the end of the financial year, most organisations take time out to consider their key financial numbers for the year that’s passed and the coming year. Even if their year is not yet complete, they can usually anticipate how the numbers will stack up for that year. Using those numbers as a baseline, they then set financial targets for the following fiscal year.
The purpose of this exercise is to be proactive and in control. It focuses the entire team on the goals of the business and makes them accountable. Without these targets, how can a business know if it’s doing a good job or not? Targets will usually show an increase on the year just gone. However, it can happen that a business deliberately sets targets that are lower than the previous year. For example, I was working recently with a UK energy company that is de-commissioning one of its nuclear plants. The target output for future years in that plant will obviously reduce annually.
There is often confusion between forecasts, budgets and targets. In simple terms, targets are those numbers that will effectively reflect the score of the game. The key ones will include outputs such as sales and gross margin (all sliced and diced up by territory, product category, salesperson, etc.) and net profit.
Budgets are usually those number that refer to the cost of how those goals will be scored. They include overheads such as payroll, marketing, distribution, housing, etc.
The methodology used for setting targets and budgets is often a combination of top-down and bottom-up. Top-down is where the organisation looks externally at what is going on in the marketplace and internally at its own strategic goals and financial investments. That helps to set a blended top-down target. Bottom-up is where the individual commercial teams set targets by customer, by product, by territory and so on. Negotiation usually follows where the top-down and bottom-up targets are finalised and agreed, then distributed to various owners.
It doesn’t stop there. Unfortunately, I have come across far too many big and small organisations that feel the planning job is now done. Let’s be very clear here. Budgets and targets are not plans. If budgets and targets indicate ‘what’ we are aiming for, then we also need to consider ‘how’ we will achieve those targets.
Proper and structured detailed planning helps to guide teams on the specifics of what it will take to ensure the budgets and targets are achieved. It has to be a cross departmental team exercise to get commitment and buy-in. It should not be a solo run done by one person alone.
Here are the generic steps to take.
1. When facilitating such business planning sessions with organisations, I always bring the team through a process of external market appraisal first. What’s happening in the macro economy and the industry, who are the main competitors and what are they doing differently that is relevant? How are customers changing? What are the new trends? All of that feeds into what we call ‘Opportunities and Threats’ which should then be prioritized in terms of their impact on the business. This exercise further helps to validate the financial budgets and targets.
2. The next things to consider are the key pillars of the business in detail. For each pillar, identify your ‘Strengths and Weaknesses’. This inward navel-gazing has to be done in an honest and non-defensive way. The pillars would typically include…
a. People. Think of headcount, payroll investment, recruitment, allocation of duties, training, communications, welfare, morale and productivity. Also consider if any element of your culture and leadership needs attention.
b. Product Mix. Think of best and worst sellers, newness and innovation, product differentiation, the buying process, price architecture, packaging, customers and trends.
c. Route to Market. if you are a B2B organisation, consider your supply chain. If you are a B2C such as a retailer, hotel, pub… then consider your premises layout and standards.
d. Brand Comms. Develop a marketing and communications plan, around all relevant platforms – both traditional channels (such as advertising and PR) and social media channels. Consider look and feel, tone of voice, frequency and cost : benefit analysis.
e. Internal Controls. Consider your own internal processes, controls, costs, margin management, IT systems, etc.
3. From this list, agree your priority projects for the year ahead. By negotiation with relevant stakeholders, allocate an owner for each project. That will ensure good accountability, no ambiguity and that tasks don’t slip between two departments.
4. Set metrics for each initiative. Undoubtedly this exercise may reveal projects that will take more than a year to deliver. Nevertheless, for all initiatives you should consider metrics for the next 12 month period.
Be careful of how you go about this planning process. It is really difficult to lead it on your own, as all senior people need to be contributing to the process. Facilitating is an entirely different and objective role to be played and it’s hard to be both a contributor and facilitator. Perhaps engage a skilled senior manager from another department (such as HR) to manage the process or even consider engaging the services of a facilitator. Whoever you use should have great empathy, objectivity and expertise in strategic planning.
Once the plan to achieve budgets and targets is complete, considerations should be given to the role of leaders in executing the plan and monitoring progress. But that should be relatively easy having gone through this structured process and of course by ensuring it is all documented clearly.
You can request a copy of my Planning Blueprint by mailing me at the address below.