This column on how to balance the budget with the business was originally published on Entrepreneur.com on July 13, 2016. It is especially relevant now as people prepare their 2017 budgets.
How do you turn smart, well-intentioned employees into by-the-book automatons? By forcing them to make decisions based solely on the budget. Unfortunately, in some organizations the budget is the only tangible guidance that employees have. When the budget becomes the business bible, it will guide every decision, inhibiting your flexibility and competitiveness.
Here are four ways to align the budget with business objectives. This will help employees become more adaptable in a dynamic environment, exploit opportunities as they arise, and ultimately make the best choices for the business.
1. Give executives and leaders the final say on the budget
Empower your operating executives or leaders to have the last word on budget development and compliance, not the CFO. Your staff must consider any significant spending decision by whether it advances the goals of the department or division and the company as a whole, not just how it compares to a plan. 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.
2. Instill the company vision and goals
Of course, decentralizing power over the budget is not enough. Employees have to know what you are trying to achieve before they can make good decisions. In the absence of other guiding principles (or a vision/mission they don’t understand), the budget will still guide every business decision. Ensure that employees fully grasp the company’s and their department’s overall strategic objectives as well as how their individual job contributes to achieving them.
3. Regularly measure the performance of every group
You get what you measure. If the only consistent feedback your managers receive is whether or not they are meeting their budget, they will manage to it and not the business. Instead, work with your direct reports to create metrics that reflect performance specific to their areas and support company goals. Then, consistently measure them on these metrics to cultivate a culture of high performance.
4. Constantly push on the budget
Ask these two questions of your managers regularly: “What would you do if you had significantly more money to spend?” and “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.
At the beginning of any given year, you may not know what resources will be available six months later, especially if you are a fast-growth company. I have seen managers suddenly receive a windfall and spend it poorly, because they had no plan. I have also seen managers forced to get by on significantly less, yet deliver close to the same productivity.
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 on numbers in a spreadsheet. Cheaper and better is often possible, but only if better is clearly defined.