Tuesday 5 May 2009

How Often Does Your Business Budget?

How often does your business get out the old pencil, paper and calculator or the Excel spreadsheets to do a budget? Always the bain of everyone’s life, no commercial person enjoys the rigours of detailed forecasting and then matching resource to expectations. There’s no fun for sales animals in having to curtail their wild whims and constrain them within the cells of spreadsheets.

Most businesses do a big formal budget at the end of each year to set the scene for the new year. Most then will be a ‘fag packet’ re-budget maybe each quarter which is usually top down and goes along the lines of ‘The numbers were down on the quarter, headcount on hold, give me 10% savings across the board.’ This usually means that the new heads you had planned are out of the window and then some of the marketing budget and nice training course you had planned go for a burton. Job done for another quarter.

Some companies, at the halfway stage, might do something more rigorous as the annual pay reviews may coincide. This means that whatever was thought of in the original budget, half it then take a percentage off. Oh, and lose a few more of that new headcount you had planned as you have not made up the first quarter’s deficit.

By Q3, it is obvious to the powers that be that last year’s budget was make believe and there is not a cat in hell’s chance of making the annual figure. Worse still, the top down numbers now show that the current headcount is too high. The final mini re-budget results in freezing all hiring, even for replacements, and then some cost cuts amounting to a smattering of redundancies and sacrificing some marketing plans. By the time Q4 comes around it is time for the formal budget and more wishful thinking to go through the same cycle as before.

Budget For Survival

Does any of the above ring a bell? Thought so. How often are businesses guilty of wishful thinking in the formal budget process. I mean, there’s no fun in building a budget with no growth in it, is there? Most executives dream up ideas each year of getting X% growth for Y% cost increase or even a decrease. In fact, for many, even the basic numbers do not compute and by the time they are cascaded down the organisation, people start to wonder how they can get 10% growth on the equivalent of half a new head.

I learned an interesting lesson from a very sharp entrepreneur a long while ago. His name was Roger Haddad, a Frenchman who owned Metrologie, a Hi Tech Reseller now owned, I believe, by SCH. Roger made money, of course, and is now CEO of a new technology company in the US and France. Roger’s lesson was that you budget for survival. You can always add in growth later as you see the figures grow.

Many would poo-poo such an idea. I mean Las Vegas was not built on small ideas that did not involve speculation. But what Roger was talking about was a mature business in tough markets. There was no point in ‘wishful thinking’ but much more emphasis on pragmatism. Survival, in his book, was the most important thing in business because if you survive you have the chance to grow.

By a similar argument, Roger believed that many businesses got into trouble because the tendency in any organisation is that, once they have a new budget which inevitably means some new growth and therefore some new resources and spend, they always spend the cost before the revenue comes in. Most executives would say ‘You have to speculate to accumulate,’ while Roger’s theory was to accumulate and then speculate.

Clearly it’s a maxim that has served him well. Through good times and bad his company survived and, at times, thrived to be eventually sold for a lot of money. There is sound advice in here somewhere.

Budgeting Not Forecasting

The tendency for us all in those quarterly re-budgeting cycles is to focus on the top numbers and let the obvious cascade down. Sales and profits are down 10%, therefore we need to save 10% on costs. Done deal. Then the lower managers just focus on losing 10% of the cost, usually in future headcount yet to be hired.

It’s a fool’s paradise. The reality is that there should be rigour at every level and as often as possible. Why companies only formally budget once a year is a mystery but why there is only a top level view taken quarterly is also a mystery.

The devil in any business is in the detail.

Every £ spent should be assessed for its contribution to the profits. So many businesses, as we see now, are in difficulty and are making redundancies and losing cost. How many of these could have got their organisation right prior to the bad times hitting and ensuring that money was being spent in the right areas to get the right results? And how often were they being rigorous enough to do this on a large scale more than once a year?

The answer is very few companies have this kind of rigour. Too often, numbers get missed and out come the knives as the accountants own fixing the numbers – and this kills long term strategy. Better if businesses do detailed planning on their budget as often as possible, at least once a quarter, and better still every month or week.

Part of the problem is that once a company gets beyond a certain size and has more than a few departments, spreadsheet budgeting becomes a farce. Everyone gets their sheets, fills it in and sends it back to the main organiser, then realises they did not plan for something and change their sheet. Pretty soon, the budget organiser is swamped by tons of individual sheets and consolidations which he or she has no idea if they are up to date and have all the latest changes in them. Worse still, have they got mistakes in them? Any mistakes are going to get embedded for the entire process and this is a nightmare situation but all too common.

The best way around it is to get your hands on the latest methods of budgeting. They are not massively costly if they can help make the difference between surviving and thriving. Most are web based applications licensed per user and use common spreadsheet-like interfaces but mean that each stakeholder can do their piece of the budget, then it automatically updates the main budget sheets and tracks all changes. The budget organiser can rest easy that the budget is up to date while it means that the tool can be used as often as you like to maintain the budget process – even daily. It is far easier then to load in 'actuals' for comparisons and see trends so that actions can be taken.

Budget Often And To Survive

The advice I have taken over the years is that you can never budget and re-budget too often. The more detail you know, the more you can utilise and leverage resources to gain success. Budget to survive rather having it as your formal, annual jamboree for managers to dream up growth targets and build in cost which they race to spend at the beginning of each new year. Inevitably, first quarter, always the one laden with the heaviest in new costs, will be a struggle to hit and if you do not hit it then the rest of the year is a struggle.

Budget to survive - do it often – know the detail – plan for a better business.

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