As we near the midpoint of the year, it is wise to start thinking about next year’s budget process. But before you get into the details, regardless the size of your company, consider these Budgeting Mistakes and how to Avoid them. Remember, if you “fail to plan, you plan to fail.”
1. Not Aligned with Company Goals or Strategy.
This is the top issue I see. Budgeting is done from the financial side of the house and not comprehensive, factoring in all aspects of the business. When a budget is led from the financial side of your business, the tendency is that the Budget won’t align with your company goals.
The Fix: Start your Budgeting process with Company Goals or a Strategic Plan. This doesn’t have to be complex or a big document. It can be as simple and straightforward as 10 bullet points. And, not all of the Company’s Goals are going to be financial or quantitative. But if you start with a Strategic Plan, the points that are financial can then be drilled into and Budget & Projections created from that level. Think strategically first, at the proverbial 40,000 feet and then drop down.
2. Rushed or No Planning Ahead.
Not planning ahead or allowing for a proper budgeting period is a major issue companies either end up with no budget or a poor one. That’s because nothing good comes from rushing. If you don’t plan your budgeting process ahead of time, your planning to fail. And, in doing so, you make the entire effort to come up with a budget worthless. Don’t cram, it’s not a school assignment. Plan properly and hit it out of the park. On the flip side, don’t spend months on a budget process either!
3. No “Top Down” Married with “Bottom Up”.
The BEST budgets are ones when a “top down” is performed by key managers or owners and then a “bottom up” is created by line, staff or key users. Then, the “art” of budgeting is to “marry” the top down with the bottom up. That’s because the Top Down might not quite jive with the Bottom Up and the finesse is the decision as to which one is right. Or, neither. Regardless, build both directions into your Budget process and you’ll reap the accuracy rewards.
Want to take it one more level? Have your CEO or Owner NOT be part of either the Top Down or Bottom Up process. I call this “Budget in the Blind.” Have the CEO or Owner prepare their own simple budget. Then, marry all 3 Budgets to the final approved one.
4. Too aggressive or optimistic projections.
For an accurate, proper and most importantly, useable budget, the projections have to be REALISTIC. So, Balance is the key and this approach is most valuable in projections and budgeting. Optimism is a key trait of most successful entrepreneurs. It is typically that optimism that helped them take the plunge into starting their own business and that optimism is what fuels their perseverance to grow. But optimism can become so extreme it clouds judgement or objectivity.
That’s why Sales Projections must be realistic. They can be lofty goals but still must be achievable. So, doubling or tripling sales in one year just doesn’t happen often once a company gets over $1-5 million in size as the infrastructure won’t be in place to even execute on that sales volume if it came through in the first place. That’s why it’s so important to have objective and realistic sales projections based on historical evidence and real numbers. No matter which method you select, make sure to base your future sales projections on objective numbers and sound judgment. Without it, you’ll be out of balance and possibly, out of business.
5. No Staff Participation or “Buy-in”.
I call this “Tablets from the Hill.” This is when a Budget is done by “them.” Don’t know who “they” are? It’s the upper management or ownership or the Board. They create the Budget in a vacuum. Then, that becomes the “law” and is given to the company. The Staff simply has to take the budget. But that never works. The reason is that “Tablets from the Hill” typically aren’t accurate. And, if if they are, you had NO staff participation so you had NO “buy-in”.
Look, employees want to be part of it all. They want to participate. They don’t want to be only dictated to like little kids in school. They want to provide input. In fact, you NEED their input. That’s because they are the ones on the front lines, down in the details. Their input matters. Capture that. That’s why I recommend a “Bottom Up” budget from Staff. If upper management or ownership wants to create their own budget or targets, that’s create. In fact, we encourage that. I call that the “Top Down.” But that version of the Budget is NOT law. The way to a realistic and operating Budget is to then “marry” the Top Down with the Bottom Up. When you do that, magic happens, everyone aligns and the company soars.
6. Sandbagging.
First, if you don’t know what Sandbagging is, I’ll tell you. It’s essentially projecting LOW. Sales people tend to do this most often. They “under promise and over deliver”. While that might work in their world, in the financial budgeting arena, that under-projecting doesn’t give you realistic numbers to build your budgeting, and most importantly, your business upon.
So, don’t let your Sales people sandbag. How do you do this? Create a “tolerance” or what you could call and “over/under” to validate their budget. That over/under typically would be a percentage. So, for example, the tolerance would be 10%. So, you catch a Sandbagger with actual performance. If a Salesperson gives you an annual total but the Actual performance exceeds by the tolerance, in this example the 10%, then you can penalize the Salesperson. Maybe reduced commission earnings or maybe something not financial (i.e. affecting their bank account) but instead operations or even an HR warning. Bottomline: Catch Sandbaggers and don’t let them inside your budget process.
7. Phoning in the Budget.
I call this “going thru motions.” These are Department Heads or Managers or even Sales people who “phone” in their budget numbers. Either they’ve done it so often they’re really good at it OR they are going through the motions. If a company is in growth mode, no one should be going through the budget process asleep. It should be an active process. This is a management issue.
DO NOT let your budget participants “phone” in their numbers. Make them work. Make them think. Make them grow.
8. Too Much Details or Too Complex.
I call this the “Getting Lost in the Trees” when the “Forest” is what matters. You can avoid this by implementing 2 things:
First do NOT let your accountants be the sole owner of the Budget. Make it a company-wide exercise. And, deploy both a Top Down and Bottom Up approach. That guarantees participation at all levels and offers the best chance for accuracy.
Second, keep the Budget Process simple. Don’t let the accountants get too crazy with Excel details or even budgeting software. Keep the assumptions, formulas and metrics simple. It will not only shorten your budget process but eliminate frustration and improve accuracy.
9. Don’t Use Excel for Your Budget Creation.
Unless your company is under $1 million, DO NOT use Excel for your Budgets. It’s not that I don’t like Excel, I do. In fact, I love it. But not for a Budget. The reasons simple: Excel has formulas and cells that can get messed up.
So, use a Budget software. They have formulas and cells locked or “baked” into their software programming code. That way, your budget works. Too often, I have clients who spent all of this time to create an amazing and time consuming budget and end up with it not working due to Excel formula issues. If the budget is complex in any way, it is like the proverbial “needle in a haystack” to locate and fix the error. Avoid this with Budgeting software. There are applications for a levels and needs.
10. Failure to Track against Actual.
This might be the WORST crime of all. You do all this work to create a simple, straightforward Budget and then you don’t use it. You don’t track Actual versus Budget DURING the year. The reason a Budget work is that it is an “Operating Budget”. That means use it in Operations. The way to do that is to track.
So, get your accounting department to create monthly Budget to Actual comparisons. Even better, adjust your budget through the year as the business warrants. Or, better still, create a “rolling” Budget or projections and get away from the “all or noting” annual budgeting process. But whatever you do, crawl before you walk or run and that starts with a basic Budget and then tracking your Actual Performance during the year against your Budget.