Updated: Jun 26, 2018
How are budgets perceived in your organization? When the word “budget” comes up, do you hear a collective groan? For many, organizational attitudes are such that budgets are seen as a necessary evil rather than an exercise that will add value to the organization. Yet done well, the budget process will yield the strategic results the organization is aiming for.
How can budgets add value?
You need to start with the strategic plan. Do the individuals in your organization know what the strategic goals are? Is strategy discussed on a regular basis? Are budgets prepared with the strategic goals in mind? If you’ve answered “no” to any or all of these questions, then we know where to start. Below are four suggestions for creating a budget process that will add value to the organization.
1. Communicate strategic goals
Only 5% of an organization’s workforce knows what the strategy of the organization is. Worse, less than 30% of organizations link their budget to their strategy. If strategic goals are not known to those who are building the budget, it is likely being set based on the way things have always been done. There is no room for innovation or creativity but plenty of room for inefficiency and budgetary slack. Worse yet, it’s hard to achieve strategic goals when there isn’t a road map to get there. The budget should serve as that road map identifying where to most effectively allocate spending.
2. Seek input from people throughout the organization
Those responsible for setting strategy, and those developing the budget are often different. However, when it comes to achieving the organization’s strategic goals, both need to understand that working as a team is crucial to the successful implementation of the strategy.
Remove the silos from the budget process. Every leader should be aware of how strategy and budgeting relates to operational effectiveness and how their individual role affects the organization’s success overall. Looking for ways to partner and collaborate will allow for optimal budget efficiency.
3. Use a balanced set of measures
Many organizations tend to ignore performance measures within the budgeting process. But, by using a balanced set of financial and non-financial measures, including both input and output measures, and monitoring and communicating those measures on a regular basis, managers are able to adjust their action plans and reallocate resources where actions have been found ineffective.
4. The numbers come last
Most organizations start with the numbers with a focus on what was done last year and using a plus or minus approach. Yet, it’s only after all the consultation is done, strategy is understood, targets are set and measures established that the numbers should be put into the budget. Assumptions are developed based on the strategic goals with a focus on the current fiscal year. Once those assumptions are agreed upon, the numbers associated with the assumptions are input. Any discrepancies should focus on the assumptions and not the numbers.