Let's Get Real with Budgets!

January 2008

Many organizations have budgets. Few use them well.

A budget is the translation of the plan into numbers

Notice that the plan comes first. The budget doesn’t run the organization; it is simply a tool to keep you on plan.

A good budget is like an alarm clock

You want to be to work on time—your daily plan is to be to work on time—and your alarm clock helps you meet that plan. But if you are like me, you sometimes abuse the tool. You might:

• Hit the snooze button (four or five times)
• Turn it off completely and go back to sleep
• Reset the time
• Get up and get dressed!

If you hit the snooze too much, you will be late for work. And this hurts your true goal in life—to feed your family! No job, no food.

What if an organization hits the snooze?

If we are off plan—BUZZZZ!—a variance occurs. Actual does not equal budget.
If we hit snooze, or ignore the variance, the plan may never be achieved. This might be OK for some organizations. Maybe the plans are loose and they are just general guidelines for behavior—no one really cares if you don’t meet your plan. No one is held accountable for the plan.

But what if you actually want to achieve the plan? Hitting the snooze will really mess you up.

Why torment everyone with all that buzzing?

If your spouse has to suffer through five buzzes every morning, you are likely to find your alarm clock in the trash one day. If you aren’t going to use it right, just throw it away.

And I think many organizations need to throw their budgets away. They have become detailed super alarms that cost much more than they are worth.

When you try to throw the budget out the window, you will hear “We have always done it this way!” And this will be the voice of the budget analyst whose livelihood depends on a super detailed budget.
This isn’t entirely the fault of the budget analyst. After all, budgets are their job and they want them to be the best they can be. It is a matter of professional pride. So they are busy building the best alarm clock they can, but they have no control over how it is used. The managers are the ones that hit the snooze. And if they want to hit snooze, there is nothing the budget analyst can do about it.

Peter uncovered the truth

Peter took over as controller from a very seasoned accountant who had been controller for 22 years. The seasoned accountant spent three months training Peter about the ins and outs of the job before he retired. He told Peter that he spent two weeks out of every month feverously pulling together 20+ page budget reports that he photocopied and mailed to all managers. Peter followed his instructions explicitly and spent two weeks out of every month to get the reports out on time.

Very early in his tenure, someone in Peter’s family passed away and he left to attend the funeral. The funeral occurred right in the middle of the dreaded two-week budget crunch time and Peter worried the whole time he was gone that the company was falling apart without him and the budget reports.

When he got back, he had so much to catch up on that he didn’t get around to the budget reports for a few days. Strangely, no one had asked him when he was planning on getting the budget reports out. His first reaction was a surge of gratitude—he was very thankful to be working for such a kind group of managers. They knew that he was grieving and that he was new so they cut him a break.

But later that week, he began to suspect that they may not have even noticed the reports weren’t done. He wondered what would happen if he didn’t send out the reports again. So, the next month, he created the reports, but kept them to himself and waited for someone to request them. No one did. He was right; no one was using the reports.

Peter decided to talk to every director and manager to ask them what information he could provide that would help them in their jobs. He was then able to customize his reports and cut his work load down to four days out of every month. This freed him up to work on modernizing the accounting department, which it obviously sorely needed.

Don’t budget just to budget

In future newsletters, we are going to talk about what makes a good budget. But please don’t get so hung up in the minutia—the theory—that you forget to ask if you really need a budget at all. Many of us don’t, because we don’t follow the first rule of budgeting. The first rule is “you must hold managers accountable.” When the alarm goes off, something needs to be done about it. You need to get out of bed and get dressed. Without that, you might as well just throw the alarm in the garbage.