Why Your Company’s Budget Isn’t Working, and How It Can
Ask five small businesspeople why they dislike working with budgets, and you’ll get a variety of answers. Most often, though, you’ll probably get an earful about how difficult it is to know months in advance what their company’s revenue and expenses will be six months down the road.
But that’s the whole point. You don’t have that information at first. Even if you consult historical data, you know how income and expense items can skew wildly, depending on factors like the season, the general economy, trends, and the ongoing quality and usefulness of your products and services. Businesses might be more likely to create budgets that fell close to the mark if they thought of them as tools for:
- Planning and goal-setting, and
Changing Your Thinking
Some managers think of budgets as sets of numbers that are supposed to magically fall in line accurately every month. That’s the first reason why they don’t work sometimes: simple perception. Yes, businesses should absolutely try to stay as close to their budget numbers as they can.
But if you feel that you somehow failed because you overestimated income or underestimated expenses, you’re mistaken. What did you learn from those miscalculations? Do those discrepancies point out personnel or production or sales problems that need to be addressed? The budget numbers you missed may help you open up needed communication with your managers and/or employees.
It’s good to be optimistic. It’s also good to be realistic.
Lack of a long-term commitment is often the culprit, too. It’s easy to throw your hands in the air and toss your spreadsheets in the first few months. But budgets get better with age as you learn how to better predict the future based on past performance and awareness of future possibilities.
So don’t create a budget unless you’re willing to give it the time and attention it requires. If you give up after six months, you’ve wasted a lot of time, and you’re less likely to attempt budgeting again.
Oddly, perfectionism can work against you. You’d think that perfectionists would gravitate to the seeming precision of budgets, to those clean, orderly rows and columns that look so absolute. Au contraire. Anyone who works on a budget must be willing to deal with its fluid, evolving, sometimes-messy nature.
Some managers don’t like budgets because they’ve let their own grow stale. Budgets that get created, approved, viewed by company principals and/or potential investors, and then are simply allowed to exist as an exhibit on someone’s hard drive, on paper, or in the cloud, are of no use to anyone. They should be revisited monthly, and numbers revised to match reality.
Budget creation should not be a solo activity. You need to hear from the individuals who spend money at your company, and those who bring in revenue. You don’t have to make this process a free-for-all, getting suggestions from all directions. You know who you need to hear from.
People are productive and creative in their jobs for a variety of reasons. But it doesn’t hurt to throw in something tangible to motivate them further to increase revenue and reduce expenses. So consider the possibility of offering incentives. You don’t have to give away a trip to Cancun for meeting or exceeding budget expectations, but you could offer an extra afternoon off or a cash prize or an overnight at a nearby resort or hotel.
A Journey, Not a Destination
There are other things that managers don’t do as they approach budgets.
- They don’t build in any wiggle room for future opportunities, emergencies, etc.
- They consider their business plan and their annual budget as two separate entities, when they feed into each other so much.
- They don’t use state-of-the-art tools like cloud-based accounting software, and
- They don’t think about the insight that their financial advisors could offer.
If you wanted to summarize the barriers that stand in the way of effective budgeting, it might be these two – very correctable – negative mindsets: Not being honest with yourself, and failing to incorporate what you’ve learned into future planning. Creating budgets is a never-ending process and an ongoing learning experience that can contribute tremendously to meeting your company’s overall goals.