Many budget processes look like this:
- They happen once a year and go out a year ahead.
- Managers and departments have every incentive to ask for everything, whether they need it or not, because their demands will be negotiated down. If they don’t ask for everything, someone else will.
- Managers and departments often also have the incentive to spend everything from the year before. If you save money, you obviously didn’t need it and won’t get it next year.
- Trust is minimal, as is input from people outside the room — the rank and file, particularly.
- A budget is cobbled out of this somehow and sets the tone — and maybe the strategy — for the next year. See you in 12 months.
Sound familiar? For Aubrey Daniels, a noted expert and author on performance management and other management, leadership and workplace issues, budget planning is one of the more frustrating things about companies today, and he has some ideas on how to improve the process.
That fix doesn’t require getting rid of budgets, Daniels says, which can bring discipline to companies and help everyone have a basic understanding of where the money is and where it’s going.
“It’s the managing and behavior around the budget that’s the problem. It’s developing a way that people feel a commitment to a number because they came up with it.
What are we to do? This seems to me to be a problem that can only be overcome one company, one budget cycle at a time, and only if senior management is interested in doing things a different way. That sounds, and is, difficult, but not necessarily impossible.
And so the best course of action isn’t a step-by-step plan, perhaps, but a change of mindset. Here are some of the keys Daniels offered to me recently about how companies can get into a better mindset for budget-planning.
Acknowledge the problems
“You need a budget at some point; you need to know how much money you’ve got,” Daniels says. “And of course, if you think about the annual budget, people do better when they have some targets.”
The problem is that budgets rarely come out this way: “When I was in the Army, there was a saying, ‘Ask for four, expect two, and get one.’ You always asked for more than what you wanted because you knew you wouldn’t get what you wanted.”
Those are the games companies play. And woe to anyone who tries to unilaterally do things the right way. As Daniels relates about his time advising an electric company,”One of the guys said, ‘I’m just gonna ask for what I need. They told us, ‘Look, we need a bare-bones budget, so I’m going to tell them what I can do.'” The company asked for cuts, but told managers this was the last set of cuts. That manager made a budget request that reflected what he could “live with.”
But months later, the company came back for more cuts, leaving this team underfunded. Were the other teams underfunded? No, because they asked for too much, and the later cuts brought them in line. That one manager was penalized for giving an honest projection.
“There’s no particular glory in meeting your budget”
The other problem is when you don’t spend all your money. You’ve saved! Congratulations. But, and Daniels experienced this personally, if you spend less than your budget, your “reward” is to have your budget cut.
“I was a naive, brand-new clinical psychologist, and I thought saving money was good. So I trained volunteers to do some of the things that normally staff would do, and I had money left over. I had a couple positions I didn’t need to fill. … So I was real proud of the fact that I’d saved about $300,000, which was big money in those days. But my boss cut my budget by $300,000, since I saved that much. And so it was the last time I ever did it.”
It’s worth noting that there are exceptions — Daniels described a particular Kodak manager who was so proficient at hitting goals and budgets that his requests were eventually accepted without question.
Senior management sets the tone, but …
As the manager at the electric company learned, individual managers and departments can’t make change happen themselves. A supervisor or department head can get ideas and input from their people, which is great, but it’s difficult to go rogue on a budget request — especially if you’re offering a true number when nobody else is.
What is needed in terms of top-down leadership? It’s as simple as senior management demonstrating trust and trustworthiness, Daniels says. “If they have a process where the senior management says … ‘You’re important to us. Your ideas are important, you have a lot of ideas about how we can economize, about how we can increase revenue and all this kind of things, and we want to hear them. And we want to use them to develop a beginning budget for next year.'”
… success start at the bottom
It’s a good step to get ideas from your department heads, but that alone is woefully inadequate. Daniels notes the saying, “‘The people who do the job know the most about it,” but when it comes time for budgets, companies rarely go to those knowledgeable people and ask, “Here’s the deal. Here’s what we spent last year. I need your ideas about what we need for this coming year.” Such a request can be delivered in many ways, but “having their involvement in it at that level produces a very different outcome,” he says.
Daniels discussed a television tube manufacturer that had a problem for 18 months. He advised supervisors to go to their teams, say they had a problem, and ask for help. The supervisor with this protracted issue went to his team, and a worker immediately said, “I know what that is.” That worker had the answer, so why didn’t he say something? He said, “Nobody ever asked me.”
Trust, transparency and clear requests to smart people on the front lines are inherent in the approach Daniels advocates for. Engagement and idea generation is done by doing, not by wishing it so. And the rewards of such efforts? Better intelligence, better ideas and a better chance of having employees commit to the overall budget and plan.
Faster, quicker, smarter budgets
Deliberate planning can occur outside of the yearlong budgeting model. Daniels says that timespan makes for planning that can easily become out of date and a company that has little ability to respond. The problem only gets worse when the acceleration of technology advancement is considered, he argues.
One example we discussed was Instagram and its rapid growth in a field that essentially didn’t exist before the mobile app was created. While Instagram is a bit of an outlier, not having revenue and the startup culture necessarily more flexible than an old-line firm, there’s also no way the company could have scaled to 7 million users in less than a year if it ran on year-long planning and budgeting cycles.
How can companies have more nimble planning? That remains a difficult question to answer, but, as Daniels argues, if you focus on having more people involved, invested, committed, you’re much more likely to budget successfully — and pivot when needed.
James daSilva is a senior editor at SmartBrief and manages SmartBlog on Leadership. He edits SmartBrief’s newsletters on leadership and entrepreneurship, among others. Before joining SmartBrief, he was copy desk chief at a daily newspaper in New York. You can find him on Twitter discussing leadership and management issues @SBLeaders.
Aubrey Daniels, Ph.D., is the founder of workplace consulting firm Aubrey Daniels International and president of the Aubrey Daniels Institute. Dr. Daniels, who coined the term “performance management,” has written six best-selling management books and is a sought-after keynote speaker. He can be reached at [email protected].
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