Budgets Don’t Work

 Author: Martin Webster, mwebster@profitstars.com

Jack Welch, former Chairman and CEO of General Electric, once said, “Budgeting is the bane of corporate America.”  While I’m not sure I agree with Mr. Welch that budgeting results in “death and destruction” (one definition of bane), the premise of his statement is true.  When used improperly, budgets can be limiting and sometimes prevent organizational growth.

The fact is budgets as a strategy don’t work.  Unfortunately, some organizations use the budget as their guiding force.  Conversely, no strategy will ever be successful without the financial support of a fiscal budget.  The challenge is to effectively marry corporate strategies with the budget, something 60% of organizations don’t do according to nearly every industry survey.  There are some best practices you can employ to ensure your budget aligns with your strategic goals and supports your financial success.  Here are the top three.

Best Practice #1 - Use Strategy Mapping
A strategy map is a diagram that is used to document the primary strategic goals for an organization.  The end result of a strategy map is to develop actionable strategic objectives that center on the organization’s Mission, Vision, Values and Strategies.  The four basic categories of a strategy map are 1-Financial, 2-Internal Business Processes, 3-Learning & Growth, and 4-Customer. To complete the map, senior management must create specific strategic Objectives, Measures, Targets, and Initiatives based on their answers to the following questions:

1. To succeed financially, how should we appear to our owners?
2. To achieve our vision, how must we look to our customers?
3. To satisfy our customers, at which processes must we excel?
4. To achieve our vision, how must our organization learn and grow?

Best Practice #2 – Use a Corporate Scorecard
Originally designed by Robert Kaplan and David Norton in the early 1990’s, the corporate scorecard is a performance measurement tool that adds strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.  Once you’ve completed the strategy mapping exercise, creating the scorecard is easy.  As you can see by the example below, the scorecard directly reflects the answers developed in the strategy map.  The organization now has an objective guide to measuring progress toward strategic success, including financial objectives and measures.

Best Practice #3 – Budget Beyond the Wall
Once the corporate scorecard is developed, it’s time to align the fiscal budget.  Most organizations budget to the wall, which means the end of next fiscal year (usually 14-16 months out).  That’s the approach that Mr. Welch finds limiting.  When you hear your managers’ make comments like, “It’s not in the budget”, you may have a budget that is out of synch with your strategies.  The key to successfully marrying the budget with corporate strategies is to first create a long-term strategic budget, one that addresses the financial objectives developed on your corporate scorecard.  This budget will go beyond the wall because most corporate strategies take place over three to five years, not fifteen months.  Once you’ve completed the strategic budget, simply slice out the twelve months that represent next year’s budget and use them to stay on track throughout the year.  This will ensure your strategies and your budget are aligned.

While these three best practices will go a long way to ensuring your budget is a tool that supports your strategic goals, there are others that should also be addressed such as getting buy-in from front-line staff, providing financial management education to your team and holding them accountable to the measures and targets identified on your corporate scorecard.  The bottom line is to let your strategies drive your organization, not your budget.

What budgeting challenges are you facing this year?