I’m of the opinion that developing the annual sales budget is the acid test that you’ve got a good strategy and that it’s been well communicated through the organisation. I say this because generally a budget is developed bottom up and if it accords with what strategy demands without any forcing then you’ve got it right. You’ve communicated the strategy, it’s been understood and it’s now being reflected in a key operational plan viz the budget.
I shouldn’t have to say this but I’m sure we all know instances where the budget is an accounting exercise. It’s run by the accountants to deliver a cost budget. The sales budget is either set by senior management or based on numbers from the sales force but then massaged to fit. End result no ownership and probably poor performance through the year as every review meeting ends up as a fight over who’s responsible for the poor performance vs budget.
It doesn’t have to be that way so here’s a few ideas about how to avoid it.
- if you’ve got a strategy communicate it. Make sure everybody in the organisation knows what it is, why it is what it is and what it means for him or her. That’s a job for directors and senior managers and they should be measured by how effectively they do it.
- rescue the budget from the grips of accounting. This is not a criticism of accounting: it’s filling a void left by the rest of the company. But make sure that the budget is ‘owned’ by the directors and senior managers of the company. If the ‘budget pack’ is to be sent out by accounting, sensible enough because it will do much of the later number crunching, let it be made clear that this is on behalf of the MD et al.
- make it a bottom up budget. This should not be a problem because most budgets are but make it clear to the people who provide the numbers that they are their numbers and they will be responsible for them.
- tell the organisation what the budget is all about and what’s expected of it. This should be straight forward because it’s well-informed about the strategy (see 1 above) but make it clear what the business situation is today and what the business environment is likely to be like during the budget period. Then tell it what’s expected.
- plan with some granularity but not too much. Don’t go for infinitesimal detail. That takes too much time and provides apparent precision but which is generally useless. But don’t go for no detail either otherwise you won’t have the data you will need to manage the business.
- test the budget which comes back against expectation. If you’ve done 1-5 right you should be OK. If not be careful. The organisation is intelligent and is telling you something. Maybe business is tougher than we’d like, maybe the strategy isn’t understood, maybe there’s no appetite for ‘one more push’. Whatever the reason understand it then respond rationally. Don’t just force a revision.
- communicate. Cascade the budget back down the organisation and make sure that everyone understands what it means to him or her.
- begin to manage performance against the budget before the budget period begins. For a calendar budget that means do a Jan forecast in December. Don’t wait until you start the new budget period because that will mean you will lose maybe 2 weeks of management impact. And that’s the best part of 5%.
- manage by month and by product. The annual budget is made by making every monthly budget. And the total budget it made by making every individual budget (that’s what granularity is for). Manage budget performance in detail and continuously.
- if the directors and senior management want upsides let them have them but that’s their responsibility. Leave the organisation to deliver the budget and reward it accordingly. If it’s a budget for strategy it’s all that you need.
