It’s that time of the year again… time to create next year’s budget. Budgeting in the best of times is difficult, and now it’s even more tricky with the uncertainty of the pandemic, and more. It’s time to take a new approach.
So before you dive too deeply into the budget tar pit, here are my key takeaways from discussions with my executive coaching clients:
1.Rethink Budgeting To Focus On Outcomes. Why do we budget? The same reason we do any type of planning—it’s an attempt to control, predict, effectively allocate resources, maximize growth, profits and earnings per share, ensure stability and certainty. Yet in today’s world of relentless and rapid change, we must be nimble, a collective (no more silo-ing departments and then punishing poor performers that usually have performance problems due to failed dependencies/contingencies with other departments!) And have you noticed that things always change? And then, the vast majority of the time, the plan does too. But in today’s new world are we measuring the most impactful outcomes? Here’s what our most financially and culturally effective clients are considering as updated outcomes they want to see in a healthy business:
a.Customer experience and engagement
b.Employee experience and engagement (this include cross-functional, inter-departmental effectiveness and collaboration)
c. Ecosystem experience and engagement (your strategic partners, resellers, other partnerships are here)
d. Sustained profitable growth (we’re ensuring we don’t rest on our laurels here)
e. Sustained profitable operational effectiveness (we’re watching expenses here)
f. Sustained innovation (we’re keeping our competitive edge here)
g. Departmental and organizational Key Performance Indicators (KPIs) to keep everyone focused
… all of which help us to predict the ultimately unpredictable, because people are creating the results anyway. That’s why we measure their outcomes first.
2. Set Strategic Guidelines For Financial Focus. Like Core Values, which help us make behavioral decisions in the heat of battle, Strategic Guidelines help us make effective decisions when the grenades are flying, when the rug has been pulled out from under us, when supply chains have dried up, when currencies have crashed, when competitors have blindsided us, when the calamity of the day has occurred. When we focus on Strategic Guidelines (which you’ll draw from the bulleted list in item #1 above), we will be better equipped to allocate financial resources in line with what we need to achieve as an organization. Then we’ll be more likely to consider cross-functional dependencies and contingencies and create effective (and not siloed) departmental budgets.
Doing an outcome frame for each objective in item #1 above will help you ask the most appropriate questions to uncover what the priorities are, the appropriate allocation, what the business needs versus what is sexy/compelling/a bright shiny object, and more. Here are the outcome frame questions:
· What would we like? (tangible outcome we can create and maintain)
What will having that do for us? (specific benefits and how we’ll feel, how our key constituents will benefit)
· How will we know when we have it? (specific measurable proof)
· What of value might we risk/lose in order to get it? (what is the “cost” of getting the outcome we want? What side effects may occur?)
· When, where, with whom would we like this outcome? (time, context, key players)
· What are our next steps? (key planning steps here)
The Outcome Frame sheds light on what will truly move the needle for our business. It helps my clients see into their pet projects, their assumptions, the costs, and they make much better decisions and avoid caving to unconscious bias too. For example a few years ago I was helping a client with their annual planning. They had a distribution partnership with an enormous Big Box retailer that, although impressive on their web site, was high maintenance and very low profit. It was clear that the business would be better off without this partnership, so after some agonizing they terminated it. This led to my client having the time/energy to secure 2 new partnerships that were far less work and far more profitable. The Outcome Frame exposed this.
· Create budgets based on the outcomes you want—they’ll be more likely to be achieved
· Ensure all departments are aligned with the overall strategic guidelines so everyone is “in it together”—it’s “our” overall budget, not coveted by a certain department
· Learn to love change and to zoom out to track how the business is doing at a high level, then zoom in to the details
I’ve lived many lives: serial entrepreneur, technology and CEO advisor, venture capitalist, engineer in the early days of Microsoft. Today I help CEOs in rapid growth and turnaround scenarios to achieve previously unheard of results through seeing into their blind spots, aligning their team and board, changing challenging behaviors, increasing team accountability and execution. Some call me a business strategist, some call me an executive coach.
Critics: Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income. Performance Based Budgeting attempts to solve decision making problems based on a programs ability to convert inputs to outputs and/or use inputs to affect certain outcomes. whatever Performance may be judged by a certain program's ability to meet certain objectives that contribute to a more abstract goal as calculated by that program's ability to use resources (or inputs) efficiently—by linking inputs to outputs—and/or effectively—by linking inputs to outcomes. A decision making—or allocation of scarce resources—problem is solved by determining which project maximizes efficiency and efficacy. Zero-based budgeting is a response to an incremental decision making process whereby the budget of a given fiscal year (FY) is largely decided upon by the existing budget of FY-1. In contrast to incrementalism, the allocation of scarce resources—funding—is determined from a zero-sum accounting method. In government, each function of a department's section proposes certain objectives that relate to some goal the section could achieve if allocated x dollars. Flexible Freeze is a budgeting approach pioneered by President George H. W. Bush as a means to cut government spending. Under this approach, certain programs would be affected by changes in population growth and inflation. Program Assessment Rating Tool (P.A.R.T.) is an instrument developed by the United States OMB to measure and assess the effectiveness of federal programs that review the program’s purpose and design, strategic planning, program management, and program results and accountability. The scores are rated from effective (ranging between 85 and 100 points), moderately affective (70-84 points), adequate (50-69 points), and ineffective (0-49 points). Priority Based Budgeting is a response to poor economic conditions. As opposed to incremental budgeting, where resource allocation is determined based on marginal shifts in costs, priority based budgeting fixes the amount of governmental resources and then allocates resources across the various programs. The programs receive their allocation based on their priority; priorities may include safe and secure communities, health, education, and community development among others. Outcome assessment then determines the efficacy of the programs. Although this approach is pro-democratic, critics suggest the administration of this process is extremely difficult. See also Budget Budget process Budget theory Constitutional economics Political economy .