Which came First, the budget or the Plan

By Hayden Jones
Managing Consultant

Have you ever taken a vacation without planning it? If you have, you probably ran out of money, socks or underwear well before you ran out of vacation. Or you missed doing and seeing many things that would have been included had you developed a plan and budgeted appropriately. Most people try to avoid these complications on a vacation, so they plan and then develop a budget. If the budget becomes too large they modify the vacation plan.

Ironically, many companies go from year to year without planning. Oh, they create a budget and they call it planning, but the two are separate functions requiring independent thought and decisions. If more companies planned their next year’s activities as well as most people plan their vacations, there would be major improvement in expense management. 

Developing a plan and a budget can be a simple process, but it requires sequencing and decision making.

First, the plan:

1. Decide what you must do to meet customer demands in the next year. This usually includes services you performed this year and new initiatives driven by product changes, legislation, corporate policies or competition.
2. Determine what you would like to do beyond meeting customer demands. This requires the planner to differentiate between the must do’s and those initiatives that are not required but may be an investment in the future. These can range from research and development to improving the company benefits package. If not done, they will not impact the customer, the employees or the company’s bottom line.
3. 3. Document the plan. Just as you might develop an itinerary for a vacation, documenting the plan provides guidance for the next year.

Second, the budget:

1. Determine the cost of must do’s. Be sure to start from zero dollars and build the costs. Don’t just add X percent to last year’s budget and assume it is correct.
2. Determine the cost of things you would like to do. Follow the same procedure. Assume you are starting with no money in a budget and you must determine exactly what each item will cost. This will be of great assistance in the decision-making process to follow.
3. Add contingency funds based on realistic need for non-budgeted services. We all know there will be surprises.  Functions may be required that could not be anticipated but must be completed without going over budget. It is important to document why and for what type of activities you are adding a contingency fund.
4. Develop a budget. Using the plan, identify the cost of each element of the plan to be used in evaluation and decision-making to follow.

Third, make decisions on plan and budget:

1. If the budget is too high, determine which items in the plan and their associated costs will be eliminated or modified in order to bring the budget into alignment with expense goals.
2. If the budget is too low…I can’t believe I wrote that.
3. Finalize the plan and the budget. Now everyone knows what is planned for next year and what will be spent to implement the plan.

This isn’t new. It’s called zero-based budgeting, and it works.  Just like planning a vacation, it requires some thought, some intuition, some investigation and some decision-making. Proper planning and budgeting permits management to lead the organization into the new year. And just like in a well-planned vacation, everyone is looking forward to the coming events.