An annual budget creates a roadmap to success – at least that is what has been drilled into every business owner. But there is a big difference between having a budget and building success. And there are a few easy ways you can fail at budgeting.
1> Your budget is not in sync with your strategic plan.
Annual budgets have a short-term focus, which creates an intrinsic focus on “making the numbers each month. This is especially true when bonuses and incentives are tied to quarterly or annual targets. The fallout is that managers become reluctant to spend money on initiatives or opportunities that are not in the budget or have a multi-year timeframe.
2> It’s obsolete within months.
Business conditions change – the last two years illustrated this in dramatic fashion, but even outside of those years, businesses endure changing conditions on a regular basis. Opportunities arise, major customers leave, suppliers disappear or are bought out and new owners change terms. Despite these changes, internally people are still trying to achieve the outdated numbers. As the business world becomes more dynamic, the static budget diverges from reality more and more.
3> It doesn’t motivate the right behavior.
Depending on the perceived role of the budget, the behavior of different departments can function more for preservation than success. Managers may ask for larger budgets than needed to make sure they don’t get penalized the next year with a smaller allocation. Others may lowball targets to make their performance look better; as mentioned above, this is a larger risk when incentives are tied to budget measurements. Innovation is avoided and the result is that the company is looking to the past instead of the future. (In the military this is defined as fighting the last battle instead of the next one.)
4> It is ignored.
Often the biggest reason for failure is that once the budget is finalized, the binder is put on the shelf, and that is the last time anyone thinks about it until the next year’s process starts. For managers, the long-term success of the company is out of mind, replaced by “what results can I show this week or month”.
Building an annual budget that includes these traps will almost certainly guarantee that your budget will not help your business succeed.