A good friend of mine is the President of a well known, not-for-profit institution. He’s got a strong strategic background (he helped Jim Kilts turn around Gillette and subsequently sell it to Proctor & Gamble). Here’s his story:
“We had an amazing three day strategic retreat that ended with some very actionable initiatives to drive our enrollment membership and donations. This wasn’t some pie in the sky strategy, but a series of projects that all had concrete action steps. I can’t tell you how good I felt about it as the new President stepping in to lead this organization.”
But alas, that feeling wasn’t going to last long. A while after that strategic retreat they entered their budget cycle. Everyone went back to the way budgeting had always been done… taking last year’s spending and adding X%… haggling over dollars… negotiating and horse trading.
The well crafted strategy and action plans they worked so hard on became victims of the budget process.
“When the CFO handed me the budget, the first question I had was, ‘Where’s the strategy’? All I saw was a P&L with a list of accounts in it. There was a column for the budget, and other columns for last year and the latest forecast and all these comparisons. Lots of numbers… but no projects, no initiatives, no strategy.”
The truth was there was no way of reviewing the budget and seeing if the initiatives were all properly funded. In fact, many of them weren’t funded at all. Ouch. The President concluded he didn’t have the right CFO. Double ouch.
I don’t want to get into all of the mechanics of setting up Excel budget templates with tabs for initiatives, and how you need to write linked formulas to overlay that spending on the master template, but I can sympathize with anyone who’s tried to do it.
It ain’t easy. But here’s what happens when we don’t link the strategy to the budget. We don’t budget what’s important. And if we don’t budget what’s important, the entire value of the planning process gets destroyed. We should put our pencils down and refuse to do it. It’s little more than a mechanical exercise. I don’t even think it actually accomplishes its secondary purpose (to cap spending).
So here’s the bottom line. Figure out how you’re going to budget projects and initiatives (and overlay them on base spending). Build your budget review sessions around them. Make sure that what’s important is what gets budgeted.
If you’re already struggling with Excel hell and a complicated nest of spreadsheets, then maybe it’s time to ask for help.
If you want a visual example, take a look at this video clip. If you’re going to build something on your own (perhaps with the help of your IT department) this might be what to aim for. The theme of the video is “budgeting like managers think” and the example given is a strategic marketing campaign.
As always, comments and suggestions are welcomed.
By: Lawrence Serven, from: http://blog.xlerant.com/Blog/bid/70937/The-Missing-Link-Budgeting-and-Execution
Lawrence Serven is co-founder of XLerant,Inc. Lawrence, the author of Value Planning: The New Approach to Building Value Every Day (John Wiley & Sons) brings his passion for best practices to bear in helping organizations find solutions to their budgeting and planning challenges. He combines real world experience as a planning executive for Fortune 500 companies, and his consulting experience as a practice leader at Deloitte Consulting and founding partner at The Buttonwood Group, to bring innovation and subject matter expertise to developing financial software. His work has been profiled in The New York Times and Harvard Business Review, and is a frequent contributor to CFO Magazine and other leading business publications.
The budget should in essence be the financial representation of a company’s strategy, goals, and objectives. The process of preparing a budget should not really even begin until these are agreed upon. I’ve seen this too many times before, where the Finance Department prepares a budget based on last year’s numbers, without even speaking to company management. The result is that the budget is just a numbers exercise, with no real meaning or effect.
Preparing an annual budget based off of prior year’s spending will ensure the ratification of prior decisions, good or bad. Though it will take more time, I am a firm believer in the zero-based approach to preparing a budget. This will help to ensure that all expenditures receive proper attention and justification in support of agreed-upon goals and objectives. It also forces managers to become more familiar with the financial accounts and ultimately become accountable for their performance.
Thanks, Frank. So true that >>forces managers to become more familiar with the financial accounts and ultimately become accountable for their performance.<< Thanks for your thoughts!
As a former CFO, I couldn’t disagree more. A strategy and a budget have nothing to do with one another. Zero. Zilch. Zip. And anyone building a budget inside Excel needs to have his/her head examined. That’s what accounting software is for.
Thanks, Warren, so true! You might want to take a look at our just-published article on spreadsheet risk.