It may seem strange to hear how little a Finance person like me cares for budgets. After all, how can you control spending without a budget? My response: did you ever consider that you might control spending more easily if you threw the traditional concept of a budget out the window?

I have three main reasons for hating traditional budgets.

• The cost of preparing, monitoring, and reporting against the budget far exceeds its benefit to the company’s bottom line. Whether you’re a corporate senior executive, middle manager, or the financial analyst for one of these, the words “budget season” likely cause a chill to run up your spine. Think of the hours spent trying to work with the budget templates provided by Finance, followed by the hours in various meetings trying to justify that budget, only to be told you have to haircut everything by 10%.
• The quantitative aspects of budgeting drive out the focus on the qualitative ones. When was the last time “budget season” was preceded by a thorough, qualitative assessment of the company’s short- and long-term goals, followed by the strategic planning necessary to meet those goals? Put differently, when was the last time you were given the information inputs that you needed in order to develop a useful budget? I’m betting that, if your bonus is partly based on coming in below budget, there’s some strategic padding going on.
• The very existence of a budget can drive bad spending decisions. I wish I had a nickel for every time someone has asked me “how much do we have in the budget for [fill in the blank]” with the goal of assessing whether the business can afford to purchase something. I’d say that nine times out of ten such a question is not the most salient factor for assessing the value of the purchase to the business. And the last thing any Finance person wants to hear near fiscal year end is “I still have some budget money available, so I’d better use it before I lose it.” Now there’s a great rationale for a purchasing decision.

In lieu of a traditional budgeting process, here’s what works better for small, fast-growing companies:

1. Goal-setting and strategic planning come first. Corral all the senior executives into a room and force some conversations about where the business should be going and what it’ll take to get there. Goals should be both qualitative (expand into new markets, reduce turnover) and quantitative (profitability, top line growth) and need to be communicated broadly to anyone with spending authority. How to distinguish strategy from tactics? Tactics are about what you’re going to do, whereas strategy is more about what path you’re consciously choosing (or not). This helps to avoid bad spending decisions down the road, because the manager can refer back to those conscious decisions to inform the spending decision to determine if the cost is consistent with the outlined strategy .  You know your “strategy” is really just a tactical move if you can easily estimate its cost. Hiring a General Manager in Tokyo is not the same as expanding into Asia. A new hire is never a strategy; it’s a tactic. First, get your goals and strategies in order, and then spell out the top one or two tactics each department needs to do to execute on the plan.
2. Align any incentive compensation plan to the qualitative plan. Instead of measuring people against their budgets (see above re: padding), put effort into designing incentive compensation targets that reward meeting the goals defined in the qualitative plan and let everyone know that’s how they’re being measured.
3. Once there’s consensus on the path forward, let Finance prepare a spending forecast. Not having a traditional budget is no excuse for not forecasting what your financial results should be. There’s a still a value to estimating what those top tactics will cost and then monitoring so that necessary course corrections can be made. A good Finance department will have detailed historical data to inform how future spending is likely to unfold. For tactics for which there’s no internal historical data, you can solicit input from relevant internal subject matter experts or get feedback from your network.
4. Establish a process for making spending decisions that’s based on balancing the ROI of the purchase against the financial goals of the business. The first question should not be “is this in the budget?” but “will this help us meet our business goals in the most cost-effective manner?” So what if the original forecast had $10,000 for a market research study in November? Some more routine operational areas, like travel and entertainment, will benefit from a strict policy governing decisions like when business-class airfare is permissible.

In short, qualitative budgets are more dynamic, less time consuming and empower the  broader team to make decisions that are consistent with the company’s strategy.

At Volition, one of our core values is “substance over form,” and one aspect of this is careful consideration of whether an activity is the best means to its stated end. In my opinion, traditional budgeting for small companies is more about form than substance.

Marie