Budget and business mentality

My 11 years of activity translate into in 11 cycles of budgets. Sometimes I stood in the advisor position, only observing and coaching the newly created department in their budget process, other times I led it myself and fought the challenges of gathering the data along with motivating the divisions/departments’ involvement. Out of these years, for 4 I stood in the position of leading the budget, along with having an approval position, as one of the 3 managing partners of Boheme Delices.

Playing these different roles, more or less in the same context, taught me a variety of lessons and provided me the opportunity to observe multiple business cultures. Most of the time, my conclusion was the same: budgeting it’s a painful process. In many of the medium size companies is attributed exclusively to the finance department, compared with the larger entities, where divisions are involved, but where the main scope is cost and performance tracking. Reducing it to simple actions, indeed tracking is one of the budget’s purpose, nothing to argue here. We all learned the same definitions during our finance studies.

For me, the enlighten moment regarding budget, happen 5 years ago while I was stepping in a new entrepreneur position. Back then, I was sure that I kind of learned everything about managing a small/medium size company. And regarding finance…ah! I am THE expert! To be honest, I was proved wrong while being out of my comfort zone, managing a business totally different than the consulting services area. For this years I will always be grateful because I don’t think I could have learn these valuable lessons in a different way.

For Boheme delices the squad consisted of one expert in finance, a brilliant IT guy and a chef with lot of talent. We were the 3 founders of a new confectionery business in Timisoara. It was obvious that the idea was great, so we moved quickly to draft the business plan. Having in mind that relying on hope was not part of our agenda…we needed a budget too!

That was the moment when I encountered the most common mistake of small to medium size businesses – budget stands with the finance people! Initially, I agreed. Because I was convinced I knew the company well and I was the one who had to take ownership. Wrong! The “finance tribe” must lead, but every part of the business must have responsibility on their own half… yes, small to medium companies included. In reality everyone needs to get their hands dirty in this process. Based only on the work done behind a desk, without involvement from the field, the projections will lack in accuracy, and the projected revenues will not squeeze the actual performance a business can really deliver.

In the second year, the budget generated debates, precisely because in the first year the entire ownership was on my plate. But not only that. In my capacity of managing partner, I was convinced I knew better how to handle allocations. And instead of analysing openly, we were dragged into other 2 common mistakes – management knows better how to allocate and we should reach a settlement, in such a way that everyone will be happy. It was wrong again!

In our case we realised that this is not the way, somewhere in the middle of the second year. The request was growing but production couldn’t keep up, the projections we did for the design team’ capacity turned to be inaccurate and the cost of raw materials were in fact much lower than our estimates. “So, what went wrong, we asked ourselves?” because theoretically we had respected the known steps for a successful projection.

Very simple:

  1. There was no real involvement from the other teams – production, design, sales. They were involved to thick the box and fulfil the requirement. In reality, they did not understand the necessity of the process and didn’t had ownership. Their contribution was minor, because us, the finance people know better what to do with numbers, why should they even be in the room?

 

  1. Along no real involvement, the allocation of the budget for each department was in fact decided by me. In the end I was having double role, so why not. This resulted in complaints, like I am giving too much to sales and too little to production, which in the end, was sorted through a negotiation ended in a settlement. Double trouble in this case.

 

  1. When we estimated the revenues, the actual process was more of a bargain between sales and production. Sales were motivated to sell as much as possible, over the bonuses, while production wanted to limit supplying. In the end why even bother, when their salaries were not moving along with the volume of sales. So, in reality we estimated less than what the business could have performed.

All these are guarantees for failure. Even if we were reputable experts in our own fields and after the first year in business, considered trend setters, the way we’ve been approaching the budget, was just not a success story. We realised that we did all the above-mentioned mistakes and despite we were excellent individual contributors, we needed to find a different way to play as a team.

We changed our approach in that very year. All 3 of us started to have ownership of their own department budget. My role remained only to consolidate. The projection was done only after we clearly knew the strategy for that year and the areas of improvements. We realized that we are not performing as much as the business could, because we were divided into 2 companies inside the same company – sales vs production. As I mentioned earlier, sale team was motivated to sell more, because of bonuses. There for, the next approach was to motivate production to produce more. As a result, we introduced bonuses based on the number of units produced. We also changed our investment strategy, betting our money on automation and technology, increasing production without having dependency on the labour force.

Passing to this attitude, with those concrete actions, we did nothing more than treating the budget as “the backbone” of our business. We stepped out from the rooted mentality about budget and finance, challenging our company’s performance at maximum. We address it more than a complex exercise, seeing it as an opportunity to work together, to think outside the box and be adaptable.

For me, as a finance person, this was an invaluable lesson that I gained and which I started to advocate to all my clients. It’s vital to go beyond, and treat budget differently, because this generally perceived painful process, if it’s done right starts to be an opportunity – for team work, for getting new ideas to light, for achieving the best performance out of your business.

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