As we rush towards fall and Q4, every business enters budget season. Large and small businesses alike, we dive deep into the annual ritual of agreeing an operating budget. You’ll see a million blog posts on how to create them. So instead I thought I’d capture my last 40 years of creating them from rookie to more seasoned reviewer, to explain why they fail!

Firstly they are misunderstood. Budgets are a great opportunity to set out a plan of actions to achieve success. They are an opportunity to articulate alignment (god knows when the year gets into full swing, alignment can go out the window). Alignment of effort, of message, of purpose, and therefore efficiency of every employee’s activity. It’s a plumb line of calm as the market, competitors, staff, health, and stuff gets in the way.

Why They Fail

  1. Completed beautifully by really smart accountants with such impeccable formulas and macros that they seem believable.  Solution: Budgets are policy documents that are converted into aligned financial models to see if they make sense. You articulate how you expect every aspect of the business to operate next year, agree the policy and put a number on it.
  2. Budgets gets confused with strategic planning. This causes great strategic plans to be crushed by assuming short unrealistic deadlines.  Solution: Instead, assuming a December year end, strategic planning is a separate process done in Q1 and Q2. The conclusions feed into the budget process later in the year.
  3. Sales targets are set at the same level as the sales budget. No wiggle room to underperform. Set realistic sales targets and ensure sales budgets are 80% of that level. This assumes a fair but stretching set of sales targets.
  4. Sales price increases are assumed early in the new financial year budget. No room to change your mind if the market is telling you to back off and delay that price hike.
  5. Salary levels across too many departments are below market rates, ensuring that your labor turnover rates are way too optimistic. And if that is the case, it probably means your hiring assumptions are flawed.
  6. New product launch costs in terms of marketing and advertising costs are inadequate (because they are based on previous years).
  7. The business is entering a significant scaling phase ($10m to $50m or $500m to $1 billion, in other words beyond the normal growth rate) but the budget mindset is still at last year plus 10%.
  8. Every five years you need to take a step back and adopt a zero-based budget approach (see post). This imagines starting the business again with the level of business you have at present. What costs do I really need? When businesses stop thinking like a startup, they lose the agility and insights that made them successful in the first place.
  9. Your marketplace is changing dramatically around you. Think AI, think EV supply chain, driverless cars, think about most industries going through generational change. Does your budgeting approach reflect this reality?
  10. Accountability: There is too much mystery around who owns the delivery of specific budget objectives. It could be divisional profits or strategic project success or new product launches. Someone has to own the budget promise.

I hope this checklist helps. The budget process can be a remarkable tool to support your success if executed properly.