Budget: Bus Route or Road Map?

Recently, I was asked my thoughts on working with a budget. Honestly, I've avoided them for most of my career but I have had to work with them. Unfortunately, I've seen that budgets become cages or bus routes--unchangeable, locked in, no deviations. They dictate how money gets spent or not spent.

Budgets can also be wasteful. Towards the end of fiscal years, unit heads start to panic that they haven't spent their full allotment of capital. What do they do? They spend it...now...on things or new hires they may or may not need. Because if they don't, their budget is reduced for the following year. If they didn't need those things or people before "now", they probably don't need them in the near future and so assets are idled, profits are reduced, time is wasted...and so on. There's an opportunity cost to this: instead of working on substantial improvement or capturing the next revenue stream, unit heads are scrambling to meet some 'arbitrary' budget. In some ways, it's like having supervisors waste a lot of time on attendance records because of an arbitrary requirement to have shifts. (Substitute 'convenient' or 'traditional' for the word arbitrary if you prefer.)

Budgets are often determined 15 months before the final days of the budget period. One's crystal ball needs to be really polished to know that the business is still going to be following the same trajectory it is today for the next 15 months. Probability is high that something will change in the next 6 months: new customers, new suppliers/service providers, new team members, new management, new competitors, different capital resources...leading to different enterprise priorities. If budgets are like bus routes, your company goes merrily on its way until it runs into a construction zone, snowstorm, mechanical breakdown, etc.

Better to use budgets like road maps. They define how you get from here (today) to there (the end of the next fiscal year) but can be changed as the business conditions change. Perhaps you need to divert resources from one department to another to meet a competitive challenge or reinforce a struggling business unit or adapt to a new profitable market segment...all events that can appear one month after the budget is 'set in concrete'. GPS systems do this as new information--accidents ahead, backups due to construction, ramp closures, etc.--comes in and advise you of better routes to take to get to your destination. Your budget process needs to have a similar process to modify the guidelines as new information appears.

I used to be criticized at review time because my 'annual plans' weren't totally accomplished. My response: new priorities appeared, of which everyone and my boss were aware, discussions had been held and the plans were modified to adapt to the new reality. The organization was more successful than if I had merely acted upon those plans and the budget created more than a year ago.