Qualities of a Good Budget

April 2008

Last month we discussed why you would want to develop a budget. If you want to hold folks accountable for their projections and results, if you want to inform as many folks about what is going on as possible, and if you want to make sure everyone is on the right track—you may need a budget. So, the buzzwords of a good budget are accountability, transparency, and focus.

Over the years, I have collected a list of qualities that indicate a stellar budget. As we look over this list, ask yourself if your budget has these qualities.

• A good budget is on display. Have you ever heard of the concept of “open book management?” It was popularized by a manufacturing executive named Jack Stack, and his books are very enjoyable to read. I even attended an “open book conference” once because I wanted to learn more.

But open book management isn’t as much of a “system” that you can learn as much as it is a way of being. You can either be transparent with your financial results and information or you can hide it and suffer the resulting squirrelly behavior. If your folks are not informed, they begin to make up things. Rumors begin and refuse to die. Employees mistrust management. You get the picture.

Why not put your budget on display? Maybe you could post it to the internet. Or you could do as the town of Flower Mound, Texas did and splay a huge binder containing the city’s budget and variance reports out on the receptionist’s desk. Even if only a few employees and citizens look at it, knowing that it is there and available eliminates complaints about management doing things behind the employees’ backs or secretly stashing money away.

Transparency is one of the most admirable qualities of Dell’s financial policies. I was hired to teach a group of managers how to read the information they received about their financial performance each morning. At the time, each manager who wanted or needed the information received a multiple-page spreadsheet with a variety of financial and performance indicators that contrasted results against projections. Dell’s directors were wise enough to share it and the employees were wise enough to use it and manage with it—a very healthy, mature sharing of information.

Now you might be saying, “Why not let just the executives have the numbers? They are the only ones who can read them anyway.” If that is true, that the executives are the only ones who can understand the financial records, you may have a bigger problem than just your budget. You may have created a parent/child culture where the children are helpless and feel more than a bit entitled. For more on the three basic financial cultures, see a past article regarding the sandwich approach to budgeting.

One of the first tenets of open book management is to train all employees to be financially literate. The proponents of open book management are fond of referring to a video made at a Harley-Davidson plant where the guy who bolted mufflers to the bikes—and sported a sleeveless t-shirt, studded leather and a bandana—discussed the significance of the company’s ROI and retained earnings. Yep. Everyone at Harley Davidson was taught the language of finance.

• A good budget is a living document! If you aren’t going to use your budget to guide operations, please don’t create one, it is a waste of time. For a budget to be useful, you have to check in with it as often as possible. Don’t create it and then put it up on the shelf for safekeeping. Check in with it every day—as Dell does—or every week, or every month. Just make sure you check in with it frequently, otherwise, it doesn’t guide the organization and correct bad behavior.

• A good budget is a control. Yes, budgets are great tools for control freaks! If a budget acts as a control, it catches undesirable results and choices early. Nips nasty behaviors in the bud, as it were.

Let’s say, at the start of the year, that you and your directors decide that you need to keep staffing levels where they are in the marketing department. As a percentage of expenditures in your organization, you feel that marketing has been allocated plenty of resources—maybe more than they need. And although you want the organization’s sales to grow, you don’t necessarily want the marketing department to grow proportionately.

So, after a little give-and-take with the marketing manager, you set the salary budget for the marketing department for the coming year. In June you see an odd trend in the budget results. The director has used some of his travel budget to hire an outside contractor to do the work that a full-time staff would perform. Now, because your budget and budget process acted as a control, you can nip this in the bud and have that all important “Lets figure out another way to do this!” meeting.

• A good budget acts as a contract between the division and the whole organization. Wow, if you develop a culture where each manager views the budget as a binding contract between themselves and the whole organization, you will have achieved budgeting nirvana! If you can get a manager to create and sign a statement approximating the following, you are a black belt budget master!

“I, Bobby, the Marketing Director, agree that if you give me $930,000, I will maintain our market presence through advertising, blogging, and internet channels. I will also promote our newest product to the law industry.”

Now what you really need to go with this promise are some non-financial performance measures; other metrics—other than dollars—that indicate how well the marketing manager is doing. Examples might be a count of the number of new ads created, number of television spots, number of times our products appeared in print, number of web hits, etc.

For more on performance measures, see prior articles.

That’s enough budget pontificating for now. Until next month! Same bat time, same bat channel!