Beware Of Straitjacket Budgeting

Dec. 21, 2004
It can stymie your companys growth.

Winston Churchill would have described the budgeting process in most manufacturing companies as "a riddle wrapped in a mystery inside an enigma." Abraham Lincoln would have reminded us, "You may fool all of the people some of the time; you can even fool some of the people all of the time; but you cant fool all of the people all of the time." And the scholarly John Stuart Mill would have advised us, "No one can be a great thinker [or budgeter] who does not recognize, that as a thinker [or budgeter] it is his first duty to follow his intellect to whatever conclusions it may lead." My definition of a budget is "a set of financial analyses, compiled annually, under duress, created from the guesses pried out of nervous subordinates, packaged and presented in neat rows, accompanied by a business plan with enough ifs, ands, or buts to assure management approval, which, in essence, is more an expression of hope than a product of fact, which by a combination of Herculean effort, the vagaries of Murphys Law, and plain dumb luck, comes close to delivering what is promised, but which if it doesnt, comes close to getting you fired." I respect the budgeting process. It forces financial discipline and structure in an organization. But I have always had a healthy suspicion about the accuracy or reliability of budgets themselves and a healthy contempt for top managers who -- knowing how unpredictable budgets are -- accept them as gospel rather than for what they really are: managerial expectations, based upon educated guesses, gathered today but to be delivered 14 months hence, full of hope, with no allowance for unforeseeable changes, prepared in form and substance to satisfy and be approved by senior management." To me, budgets should be guides, not absolutes. To insist that budgets must be achieved come rain or come shine is foolhardy and dangerous. Its shortsighted management. On the one hand, it forces people to spend money they may not need to spend just because its "in the budget." On the other hand, it forces people to underspend at times when they should be investing to stimulate growth. I have always been a staunch advocate of managing the business rather than crunching the numbers. I believe that the strategic plan is more important than the budget plan. Your strategic plan should drive your budget plan, and both should have flexibility built into them. You cant run a business with a "stay in place" budget. Demands for short-term results often endanger long-term growth. Profits arent produced because you budget them. They are produced as the natural results of smart, effective, experienced, and intuitive management. Instead of asking, "How are you doing against your budget?" management should be asking, "What are you doing to grow the business?" Instead of asking, "How much will you make today [this month, this year]?" management should be asking, "How much can you make if . . . ?" Nearsighted management that insists on "straitjacket" budgeting will inevitably be made obsolete by farsighted management that employs strategic budgeting. As a young man, Winston Churchill was asked by a friend about a London dinner party he had attended the night before. "Well," replied Churchill, "it would have been splendid if the wine had been as cold as the soup, the beef as rare as the service, the brandy as old as the fish, and the maid as willing as the duchess." Budgets are splendid if their numbers are as flexible as the future, their thinking as profound as their number of pages, the future as predictable as their assumptions, and those approving them as knowledgeable as those presenting them. Abraham Lincoln was the epitome of a leader. He was not always right, but he understood the responsibility of leadership. He accepted its risks. He knew that it presented as many opportunities to fail as it did to succeed. For example, Lincoln quickly realized that he had made a bad decision in naming Joe Hooker to command the Army of the Potomac during the Civil War. Hooker thought being a leader was acting like a leader -- dressing as he thought a leader should and expressing himself as he thought a leader would. He played the role as an actor might -- the same way some executives prepare budgets. I started this column quoting Churchill, Lincoln, and Mill. In closing, I mentioned Churchill and Lincoln yet again. It is only fair that I give Mill his say: "In this age, the mere example of nonconformity, the mere refusal to bend the knee to custom, is itself a service." I refuse to bend my knee to straitjacket budgeting or to chief executives who employ it. Sal F. Marino is a chairman emeritus of Penton Publishing Inc. and an IW contributing editor. His e-mail address is [email protected].

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