Why You Never Hit Budget

I can recall numerous times where management had a meeting to discuss financial results.  Here is a typical interchange from one of those meeting.

Company President, “Why are promotion expenses twice what was budgeted?”

Marketing Head, “That can’t be correct.  Accounting recorded something wrong.”

Controller, “We have carefully checked every item.  I can get you the detail.”

Company President, “What do we have to do to stay within budget?”

A Conversation Going Nowhere

Have you ever been in a meeting where the conversation was similar to the above?  Did people get defensive, take sides, or even pass the blame in the form of, “You didn’t control your spending” or “You recorded something wrong” or “We budgeted too little.”  Interesting, all of these comments revolve around what people did.  The issue may really be what people did not do.

What do I mean by that?  Well, for starters, recall the budgeting process.  Usually there are a series of meeting where various department heads are asked to develop projections for sales and expenditures.  There are varying levels of detail to support these numbers, but eventually the entire management team signs off on the budget.  Then what?

Unfortunately, the next significant event is often the meeting above.  Why did this happen?  I suggest it is because nobody used the budget.  What do I mean by that?  Well, suppose you want to build a new home.  You have plans for what it will look like.  What if you never looked at those plans and just built the house?  Do you suppose the house would look like you intended?  Not likely.  If we are building a house we will use those plans to direct our actions.

The budget should be used much like a house plan.  You may have heard of the simple plan for personal budgeting where cash is placed in envelopes for each item that is budgeted.  When the cash is gone from an envelope, nothing more can be spent in that category.  This is one of the ways used to teach children about budgeting and cash management, but it is also used by many adults.

Envelopes for Business Budgets? No Way

While in business we would not be likely to use an envelope system, we can use a variation of it.  The budgeted numbers for each line item represent an envelope.  If we make employees responsible for looking at these virtual envelopes before making a spending decision, we accomplish the same thing as using envelopes.  At the end of the month there are few surprises.  The department heads already know what they spent.  Finger pointing is reduced, and meetings become a time where ideas and ways to improve are discussed.

Yes, it takes some discipline to put this into practice, but it will save you many headaches and disagreements over time, plus it will improve your results.  Of course, we must consider the level of detail with which we practice this, but the bottom line is the same.  A budget is best used as a tool to direct our spending, not as a weapon to destroy others in the company.

What do you think?  Can you implement this in your company?

Should you like to know more, contact us at: AimCFO – Contact

As always, your comments are welcomed.

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67 Responses to “Why You Never Hit Budget”

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    • Chris S - Your Small Business CFO:

      You are correct that there is much more to this. From time to time we will revisit the topic of budgeting. You can click on the Budgeting link under categories or use our Search Box for the term Budgeting to see additional discussion of budgeting issues. Be sure to sign up for email alerts or RSS notification of future posts.

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