If you are like most businesses you just finished, or are just finishing your 2011 budget. It can be a long, grueling process but now that it is finished, you can forget about it and go on running the business, right? Unfortunately, that is how far too many businesses think about budgeting, as an annual, necessary evil – something to do then forget about until the CFO or Controller presents the “budget to actual” financial statements at the end of the month.

Seriously? If that is the case, why do we do it? Because our Board of Directors says we must or the bank requires it in our loan covenants? What a waste of time! I’ve been through the budgeting process over one hundred times during my career and I’ve learned a few things that you may find interesting. In this and my next two posts, I’m going to share some of the insights that I’ve gained from those experiences.

I want to start with what I believe are the real reasons for budgeting then, in later posts, I’ll address the most effective ways that I’ve found to approach the process.

In order to be effective, budgeting must be an integral part of the strategic planning process – it is not the “end game” – rather the budget is the process of demonstrating the expected results of your strategic plans in financial terms. If your business does not have a strategic plan, how can you hope to have a budget that is meaningful? What are you budgeting for? How do you know if you are winning or losing?

I’ve identified the following five key reasons for creating a budget in the process of strategic planning:

1. Identify and eliminate weaknesses in the Company and its plans
2. Monitor and evaluate spending
3. Provide an “execution plan” for managers and employees that is based on their input during the planning process
4. Assign authority and accountability
5. Help you visualize how to maximize value creation for shareholders

This would not be complete without addressing why budgets usually fail – see if any of these sound familiar from your experiences:

1. Politics & hidden agenda (best employed by those who do not want to be held accountable for their results)
2. Management’s inability or refusal to hold themselves or others accountable
3. Poor planning process and assumptions – this usually results when a few people create all of the assumptions for the budget, have the accountants fill out the budget spreadsheet then send them out to the departments as a dictate.
4. Poor leadership – this starts at the top. If the CEO is not committed and willing to set the standard, no one else likely will.
5. Incentives and strategy are not linked. This is almost always an issue when the strategy is either unknown or has not been adequately communicated.
6. Poor or inconsistent feedback & communication – if you don’t tell employees what their score is, how can then know if they need to change course?

In my next post, we will review an outline of the strategic planning process and where budgeting fits. Until then, if you would like to discuss how to implement an effective planning and budgeting process in your business, call or e-mail us for a free consultation with one of our experienced, outsourced CFO’s.

Thanks!