Tuesday, November 30

EOY budgets, forecasts and processes

By Tim Timmons

For those who have been in big business a long time, there’s nothing I’m going to write this week about the budget process that you don’t already know. However, if you are new to the process, or if you are just bored silly, come on along.

Let’s begin by getting on the record that I am not a fan of budgets. No, it’s not that they are painful, time-consuming and laborious (although they are all those things), it’s that they too often have four problems:

1. They have little to do with reality

2. They can be forecasts based on forecasts

3. They often create unrealistic expectations

4. Managed poorly, they can create outcomes that reward (or penalize) unevenly

To be fair, the rapidly changing world has also impacted budgets. Used to be that mature businesses could get through a budget with its eyes closed. Numbers didn’t vary much year to year and if they did, there was usually a pretty good reason.

New businesses and even some not-so-new in today’s world don’t have that luxury anymore. Things change so quickly that something that wasn’t even on the horizon in October is part and parcel of everyday life in June. Think that’s an overstatement? How would you like to sell telephones? No, not the cellular variety, the kind that hang on the kitchen wall? How about wristwatches? How much longer will good, ol’ Timex be around when everyone else has something Dick Tracy would be jealous of? Too “out there” for you? OK, there’s a company within a driver and 3-wood of here that used to print those Indiana High School basketball schedule books that the banks gave away? Ask them what happened to their forecasted numbers.

The point, my friends, is that budgets can end up being an anchor that gets hung around the neck of the poor schmuck unfortunate enough to be steering the boat. Or they can go the other way and turn into an easy path to a financial reward (if structured that way).

For whatever it’s worth, I think the budget process itself needs to undergo a revolution and change.

Unless there are valid reasons (banks, leveraged assets, etc.), historic numbers beginning with last year are great checkpoints. Certainly extraordinary circumstances pop up from time to time but those should be handled as the exception, not the rule. There are few things more telling than year over year numbers.

However, conventional wisdom says to stay the course . . . because that’s the way we’ve always done it.

Sure.

Some companies create a budget based on a budget (instead of actual numbers). That happens when budgeted numbers for the current year are used as the baseline. Sound silly? Here’s how it works. It’s September and work on the budget has started. You are in the middle of the month so there are no actuals for September, let alone October and so on because they haven’t happened yet. So the budget is written based on what was budgeted from last year. Of course next October when the budget is blown away or missed badly, no one remembers. Trust me, it’s happened.

But to my way of thinking the biggest problem with budgeting in today’s world – besides the fact that the world now changes faster than we can successfully predict – is that small businesses don’t have the time and resources to do it properly.

A good budget can be a great thing. It can cause a company – from top to bottom – to examine processes, work closely with customers, evaluate competitors, consider new product lines, elimination of old ones . . . virtually everything to do with the business. The problem is, that just doesn’t happen very often in the real world.

So rather than a worn-out process that no longer works well, find a better answer. And year over year comparisons is a decent place to start.

Next week: More to come

Business Playbook is written by Tim Timmons. Timmons’ book, Coaching Success: Creating Champions for the Business World is available at www.tim-timmons.com.

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