Budgets: Deadweight or Dynamic Plan - The Leader's Choice

By Jim Dunham
Senior Consultant

The words “it’s not in the budget” can be accurate, but they can also act as a defense mechanism or as ice water thrown in the face of good ideas. I have heard those words spoken so often by managers who don’t want to deal with people thinking outside the box.

Managers also use it as a control tool to exert their power over the organization. Often they don’t want to stick their neck out for anything, and managing the details is a way to avoid action.  It’s easy for poor managers to hide behind the line items and successfully shield themselves from tough decisions by adhering to a document built more than a year earlier. They are able to do this and receive accolades from their senior manager for “meeting budget.” I have also seen many excited and motivated associates create a flame with an idea, only to have it stamped out by the brutal use of a document in a binder that becomes the albatross of many organizations.

A budget represents a financial plan for a period of time (usually a year) that is the capitalization of both the strategic and business plans for an organization. It takes form in an operating budget and a capital budget. Working within the boundaries of a budget is essential to the financial health of an organization. A company will go through a lot of work to develop this financial plan each year. It starts with strategic thinking, then moves to operational planning and finally into funding for the operational plans. In both the operating plan and the budget, the organization usually has monthly reporting that is based on the plan or budget versus the actual. It’s at this point that the budget becomes the dead weight that can drown it or the dynamic plan that an organization needs to survive in the marketplace today. It’s the leader’s choice.

A good leader will not develop a budget in seclusion, or have it done by the budget staff with input only as necessary from line management and their associates. They will involve the entire organization. There are few items in a budget that are “top secret,” but in many organizations the budget represents a book on a shelf maintained by a chosen few. It should represent the allocation of financial resources to the whole organization, with a direct link to the tasks that are planned. By that very nature it should be an open document that is discussed and shared with all the stakeholders, which includes the front line associates. How can someone tell everyone to “stay within budget and manage expenses” when the biggest part of the organization doesn’t know what that means? If we involve our associates in the budget process and explain it to them with detail, there’s likely to be a more significant level of effort to judiciously use financial resources. In fact, there’s a much greater acceptance of accountability and responsibility within the organization for the outcomes, both financial and operational. If we don’t involve them and constantly remind them “it’s not in the budget,” they stop caring about what’s in the budget, creativeness dries up, and they go home and manage their personal budgets with good long-term results. When an organization uses the line items as if they are written in stone with no opportunity to reallocate or move them from one line to another, it has handcuffed itself. This is just as if it has put a business plan in place and refuses to change despite signals from the marketplace.

If you ask most senior executives whether a budget is static or dynamic, the overwhelming majority will go with the latter.  However, when many organizations issue their budget documents, the manager getting the documents views them as static — not subject to change for any reason. Usually they have incentive plans that are based on the bottom line, but they manage every little line instead of the bottom. What happens when a new service, product, technology or process is needed to meet the demands of a changing market or customer base? In many cases our managers say, “No money, it’s not in the budget, wait until next year’s budget,” and the opportunity slips by and the organization starts to slide down. A good leader will know the budget in detail and will have many others familiar with it.  They understand they have a fiduciary responsibility to the bottom line, but they know they need to respond. They will look at ways to increase productivity and they will analyze the return on investment to see if it makes sense. If it does, they will work within the allocated capital to make things happen.

When everyone is part of the solution, the final outcomes will provide good results. In today’s rapidly changing marketplace that is being driven by consumer choice and satisfaction, managers who use the budget as a dead weight have to be replaced. What’s needed in their place are leaders who use the budget as a dynamic plan that can be worked within the total financial plan to provide better results.