TBL #001 - What's the Point of a Budget? 🤷‍♂️

We spend all of this time doing a budget every year…

Just for it to be outdated by March.

Here are three questions that will help make sure that budget is used this year instead of it being a dusty spreadsheet by the time March rolls around.

1. What’s the point of a budget?

The best way I’ve heard a budget described is like a step on a staircase.

Think of the bottom floor as where you are today & the floor you’re trying to reach as your long-term vision realized.

The steps along the way are the days, months & years to reach that long-term vision. The timeline doesn’t matter for this example.

And…every organization may have a different vision they’re working towards with a different timeline. I don’t think there’s a right or wrong approach there.

All a budget does is take the best information you have available when the budget is made & answers this question: “How do I reach the next stair on the way to the floor I ultimately want to end up at?”

If your budget isn’t aligned with your bigger vision OR you don’t have a bigger vision then the budget becomes seen as something that doesn’t hold a lot of weight.

When it’s tied to a vision as you start to deviate from the budget then you’re deviating off course from your vision.

At the end of the day, it's a measure of how well you're executing against your vision.

2. If I have a forecast, why do I need a budget?

Let’s revisit our definition of a budget…a budget defines how you’d like to go from one step to the next on your long-term vision using the best information available when it’s being made.

If that’s the case, then a forecast is just a budget with more updated information.

Every month the latest version of the forecast is discarded & you update it…but the budget stays the same.

(We’ll get to why in a couple lines)

Both are plans. Your forecast should be what you think will happen, but it should ultimately still tie back to your long-term vision.

Business moves fast & the leaders/organizations who see the winds of change coming & adapt the fastest are often handsomely rewarded for it.

A forecast helps you see changes happening in real-time so you can plan around them. For example, sales were soft in Q1 which means cash is tight. That means the hiring plan in the budget just won’t work anymore without causing a cash crunch.

So then why is a budget even needed if it’s got outdated information?

Here’s why…

Even if you have a forecast in place the origins of that forecast started from the budget planning.

The real value in the budget process isn’t the numbers it produces.

It's found in the process of hitting pause from the day to day & taking a step back to plan.

If you just had a forecast in place & didn’t have a budget to measure against then you lose a lot of helpful information.

With a budget you can measure how effective your team is at executing against a plan.

Yes, things will happen that you could have never planned for, but…the budget still acts as a measure of how your team can navigate around those to execute against the long-term vision.

3. Should you adjust your budget?

If you’re keeping a regularly updated forecast, there’s only one compelling reason, in my opinion, to why you’d ever adjust a budget mid-year.

That is if your long-term vision has changed significantly.

The long-term vision is what’s important…the budget just helps provide a plan to get there.

This is true of any goal - whether it’s a budget, weight loss goal, etc. If you change the goal because of performance it’s a slippery slope.

But…if you decide as a company to go from being a software company to a consulting company then that’s a pretty dramatic change.

Or…let’s say you planned to have 3 locations open by year-end, but now you need 7 because of a huge opportunity.

Doing a new budget for the rest of the year will probably serve your organization well. Those changes warrant going back through a planning process.

If you don’t have a major strategic change then keep the budget as a measure of how your team is executing against the plan.

If one area is consistently off when you compare actuals vs. budget then yes, it could be a sign of poor planning, but…once those are explained away the variances that are left are a measure of execution.

💸 The Bottom Line 💸

• If you don’t have a forecast in place, get one in place this month. Update & review it every two weeks & you’ll manage your organization’s cash better than without it.

• Establish monthly budget vs. actual reporting. It’s simple to implement with most accounting software.

• Understand how much of the budget vs. actual variances are related to planning oversights & how much is related to execution. Challenge finance to plan more effectively & dig in to where execution may be struggling. This is a check engine light for your business.

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