How to balance the budget with the business

budget

Photo credit: 401(K) 2013

As I mentioned in my most recent post – The budget is set so no brilliant ideas until next year – in many companies budgets are often the only strategic, tangible plans that lower-level managers and employees are exposed to by management. While the company may have some lofty mission or vision statement, those platitudes are rarely translated into actionable direction for employees. Because of this the budget often takes on the role of divine scripture, guiding every business decision and preventing the flexibility needed to swiftly exploit opportunities. Solving this budget-balancing act requires several steps to align decision making with the business.

First, the CEO must ensure that every employee understands the company vision and goals as well as how their individual job contributes to achieving them. The goals are the top priority: The focus should be on achieving them for the least amount of money; not making sure that every budget category is in balance. Managers who don’t do this will quickly get out of alignment and begin to work towards their own purposes, in line with their set budgets of course!

Second, you must remove the final say on how the budget is spent from the CFO and place it in the hands of the operating executives. Your frontline staff needs to be empowered to make budget decisions based upon whether they advance the goals of the company as a whole, not just how they fit in the different budget buckets. Budgets are static but business changes on a daily basis. A document written months before can’t possibly predict all the pitfalls and opportunities that will arise.

Third, you should regularly measure the performance of every group on metrics that support the company’s goals. In many organizations the only consistent feedback a manager may receive is whether or not they are meeting their budget. This will quickly condition them to manage to the budget instead of to the business.

The CEO sets the bar: Working with his or her direct reports, the CEO should determine what measurements are important and relevant for the business. Then, he should constantly drive and refine the operational metrics as well as verify performance.

Fourth, as the CEO you should constantly push on the budget. My two favorite questions of managers that work for me are: What would you do if you had significantly more money to spend? What would you do if you had significantly less money to spend? These two questions force managers to consider the cost/benefit tradeoffs necessary to dynamically adapt to an ever-changing business climate.

I have seen many situations where managers were forced to get by on significantly fewer resources but still managed to deliver close to the same productivity as before the cuts. At the end of the day, the company that delivers the most productivity for a given unit of capital will be the most successful. The CEO must constantly force the organization to make spending decisions in this business context instead of based upon numbers in a spreadsheet. Cheaper and better is often possible but only if better is defined.

Related article:

The Resource Allocation Dilemma Faced By CEOs Every Single Day (Forbes.com)

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September 5, 2014

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