Alan’s corner: How budgets should not be considered business plans

The purpose of an annual budgeting process is to be proactive and be in control of your own destiny. It focuses the entire leadership on the financial goals of the business and it makes them accountable. Without these targets, how can a business know if it’s doing a good job or not? They are the score of the game.

In this process, organisations usually use their previous year’s numbers as a baseline to set financial targets for the following fiscal year. These targets will usually show an increase on the previous year. But there is a better way.

The methodology used for setting targets is often a combination of a top-down and bottom-up approach. Top-down is where the organisation looks externally at what is going on in the marketplace and makes judgments on the implications of those external forces. Bottom-up is where the individual commercial teams set targets by customer segment, by product, by territory and so on. The bottom-up approach is typically based on a marginal uplift on last year’s numbers.

But it shouldn’t stop there. Far too many big and small organisations think that because the ‘numbers’ are agreed, the planning job is now complete.

Let’s be very clear here. Budgets and targets are not business plans. If budgets and targets indicate ‘what’ we are aiming for, then we also need to consider ‘how’ we will achieve those targets.

Effective planning
Structured, detailed planning helps guide teams on the specifics of what it will take to ensure the budgets and targets are achieved. It should be a cross departmental team exercise to get commitment and buy-in.

Working recently with Dubai-based Gerab National Enterprises, I supported the senior team to develop its strategy using these structured steps:

1. Scan the external marketplace.
We started with an appraisal of the external market. What’s happening in the macro economy and the industry? Who are the main competitors and what are they doing differently that is relevant? How are customers changing? What are the new trends? All of that feeds into what we call ‘Opportunities and Threats’ which should then be prioritised in terms of their impact on business. This exercise further helps to validate the financial budgets and targets.

2. Identify the strengths and weaknesses of each key business driver.
The next things to consider are the key pillars of the business in detail. For each pillar, identify your ‘strengths and weaknesses’. This inward navel-gazing has to be done in an honest and non-defensive way. The pillars would typically include:

a. People. Think of headcount, payroll investment, recruitment, retention, allocation of duties, training, communications, welfare, morale and productivity. Also consider if any element of your culture and leadership needs attention.
b. Product mix. Think of best and worst sellers, newness and innovation, product differentiation, price architecture, customers and trends.
c. Place. Consider your route to market and where there might be opportunities to open new markets, new industry sectors, online channels, mergers or acquisitions.
d. Brand communications. Develop a marketing and communications plan, around all relevant platforms – both via traditional channels (such as advertising and PR) and social media channels.
Consider look and feel, tone of voice, frequency and cost/benefit analysis.
e. Internal controls. Consider your own internal processes, controls, costs, margin management, IT systems, risks, etc.

3. Prioritise.
From this list, agree on your priority projects for the year ahead. By negotiating with the relevant stakeholders, allocate an owner for each project. That will ensure good accountability, no ambiguity and that tasks don’t slip between two departments.

4. Agree measures.
Set metrics for each initiative. Sometimes this exercise may reveal projects that will take more than a year to deliver. Nevertheless, for all initiatives you should consider metrics for the next 12-month period.

Be careful of how you go about this planning process. It is really difficult to lead it on your own, as all senior people need to be contributing to the process. Facilitating such meetings is an entirely different and objective role to be played and it’s hard to be both a contributor and facilitator. Whoever you use should have great empathy, objectivity and expertise in strategic planning. Finally, before you leave the planning room, consider governance. How will you monitor progress and hold individuals to account for delivering on what has been agreed?

Alan O’Neill is a change consultant and speaker