3 Annual Budgeting Updates that Optimize for Results
In today’s crazy-fast business world, keeping up with the pace of change and making quick decisions is like trying to sprint on a treadmill. Why aren’t businesses getting anywhere? Our hypothesis: Traditional budgeting practices are often like an anchor, holding us back, instead of helping us move forward.
Over coffee and tea, Andy Cleff and Sally Tait discussed what they learned from Beyond Budgeting. They talked about what’s problematic with old-school practices and how we can spice things up with a more dynamic approach.
Scaling Agility – The Challenge
Scaling business agility is like trying to turn a flickering campfire into a bonfire. While agility works wonders at the team level, it’s often a struggle when you’re dealing with the whole organization. One of the main culprits? Old-school budgeting that’s as ancient as the pyramids, and just as set in stone (pun intended). It’s like trying to run a marathon in high heels – it’s just not built for speed or adaptability.
The Rigidity of Traditional Budgeting: Unraveling the AOP Conundrum
First, let’s talk about why traditional budgeting practices are about as effective as doing a rain dance in the desert. While annual operating budgets are a necessity for most organizations…is the process truly meaningful?
The traditional Annual Operating Plan (AOP) in budgeting exhibits significant inflexibility due to its static nature, limited visibility into short-term dynamics, process-centric focus, and its difficulty in accommodating change. Like a road map set in stone, it lacks the agility to adapt to unforeseen business shifts and opportunities. Often, more attention is paid to perfecting the budgeting process than achieving desired outcomes, resembling a dance routine perfected without regard for whether it will bring rain to a parched desert.
Feeding Bad Habits
Traditional budgeting methods often incentivize counterproductive behaviors. Think of it like being at an all-you-can-eat buffet, but with a fixed plate size – you’re left with two less-than-ideal choices. In the context of budgeting, this leads to practices such as underestimating actual needs (lowballing), stockpiling resources unnecessarily (hoarding), and engaging in a flurry of extravagant spending toward the end of the fiscal year to avoid budget cuts. These habits, fueled by the constraints of traditional budgets, can stifle innovation and foster a short-term mindset, hindering long-term strategic thinking and adaptability.
Updated Budgeting Practices
So, why do we budget in the first place? It’s all about figuring out how to spend (or not spend) our money wisely. We want the biggest bang for our buck (literally), right? But the way we budget today doesn’t quite cut it. It’s slow and often misses the mark.
Andy and Sally introduced three key budgeting practices that can help organizations break free from the old-school budgeting shackles: setting targets, making forecasts, and allocating budgets. But here’s the kicker – don’t do them one after the other; do them all in parallel, and keep them separate so you can inspect and improve each independently.
1. Setting Targets
Setting targets is like it sounds and requires defining your goals. Instead of fixed budgets, try relative targets that keep you on your toes but don’t strangle you. Add in a bonus structure that rewards collaboration (instead of competition), and you’ve got a recipe for a nimble, learning-focused organization.
2. Making Forecasts
Forecasts help you keep an eye on how you’re doing compared to your targets. IMPORTANT: Don’t mix them up with your goals. Andy and Sally suggest flexible forecasts that adapt to short-term (context-dependent, but typically months to quarters) and long-term needs (half years to years). Think of it like checking the weather forecast – your clothing and weather gear for today vs. identifying options for potential weather ahead.
3. Allocating Budgets
Old-school budgets give each department a lump sum for the year. It’s like getting a paycheck and trying to make it last all month – sometimes it works, sometimes it doesn’t. Instead, they recommend dynamic allocation based on maximizing value. Ask yourself, “Is this the best way to spend our resources for maximum value?” That’s the question to keep in mind. Use budgets as a tool, not as the rule.
Long-Living Teams and the Power of Collaboration
One cool thing that comes with this new budgeting approach is the concept of long-living teams. These teams focus on delivering value and encourage collaboration, trust, and transparency.
Beyond Budgeting and HR
While their discussion zeroes in on budgeting and finance, it drops hints about two other critical pieces of the organizational agility puzzle: Human Resources, aka People Ops, and performance evaluation. These areas will probably get their own episode soon because they’re crucial to achieving full-blown organizational agility in today’s ever-changing business world.
In a world that moves faster than a caffeinated cheetah, traditional budgeting practices can drag us down. Andy Cleff and Sally Tait serve up a refreshing alternative with three key practices: setting targets, making forecasts, and allocating budgets. This dynamic approach encourages collaboration, innovation, and smarter decisions. As we embrace organizational agility, let’s be sure to include not just financial management but also HR practices to stay ahead in today’s constantly evolving business landscape.
Curious about how to identify, communicate, and prioritize by value? Watch this video by Enterprise Coach Kim Antelo, “The Importance of Articulating Value.“