How Strategic is Your Budget?

In many companies, and especially in PE/investor backed high growth companies (with a professionalisation of reporting as a requirement), we often see management teams rushing into the budget season (while still busy delivering the last quarter of this year) and managing it as a necessary evil. The ritual of finalising the budget is often a negotiation on additional FTE, on volume requirements and/or on project prioritisation, between Board and CEO/Executive team, and between the CFO and the different departments.

And when the dust has settled, and the teams get moving and reality is not living up to the budget forecast, we’ve sometimes heard, “oh you know, our CFO was preparing our file for attracting new investors last year, so we had to accept additional revenue locked into our budget that we all knew was not really realistic”.

As a result, teams are starting in Q1 with ‘catching up/mitigation measures’, not necessarily building the real value of the company, but rather managing the perception of performance in that particular year.

The value of the budget as a strategic tool is defined when and how it is built. Here are some practices for the budgeting ritual that can help.

Focus to overcome imbalance

Especially in high growth companies, if not in all companies, there is a permanent imbalance between various factors including the:

• market potential to be captured,
• target audience yet to be reached,
• projects to be embarked on,
• professionalisation steps yet to be made; and
• available time, resources, capabilities, management attention and leadership need.

When choosing what to focus on and prioritise, rather than starting with what happened last year, start with zooming out on the longer-term equity story and what this next year needs to be, to achieve the longer-term goals. Setting this context, then allows for agreeing on the medium-term indicators of success and must-win battles, and to align on what not to do, to stop or deprioritise.

Make resource requirements explicit

Having clarity on the strategic roadmap from a future backwards perspective, allows us to agree on the needed resource requirements and whether there are shifts required to make this happen successfully. For examples, if we want our teams to focus on improving NPS, how are we ensuring we have the capabilities, processes, and tools in place to fix the pain points in our customer journey, leverage our promotors and win over detractors?

This is a crucial step, especially when it comes down to mediating between the different parts of the organisation and potentially on who needs to give up resources to free up for other parts of the organisation. This is far more than a spreadsheet exercise; it is the role of the executive team and the CEO to put their money where their mouth is and look at the business as a whole and not sub-optimise through functional/departmental lenses.

Zoom out of the details

The budget becomes truly strategic, when it manages to visibly and tangibly represent the strategic priorities and indicators for the year, in light of the short-term performance and longer-term equity value of the company and encapsulates the key resource decisions this requires. The chances vastly increase that the budget becomes a real instrument in managing the business and daily choices.

This is not a matter of bureaucracy or enterprise-like sophistication in calculations, it is more a matter of common sense and pragmatism: do not put in more levels of detail than you are willing to manage.  It is more / as important to get the big strokes right than it is to manage up to the decimal points.

The base for your budget reflection is therefore not (just) last year’s budget, but rather (as much) the strategic roadmap for the coming year.

If the budget is made for the strategy to be implemented, then the review of the strategy progress and business review intertwine with the budget review. This sets the basis for having the mature executive discussions and decisions the business needs and deserves.

From Board to Shop Floor

Connect the dialogue at all levels by having a similar base for the Board discussions, Executive Team conversations all the way down into departments and functions.

This helps to overcome the problem of disproportionate attention to different types of discussions / presentations, as these ultimately all talk about same topics, just at a slightly different level of aggregation whether you are in the Board, in the Executive Team or in the Department team meeting.

As one CFO puts it “Thank God we no longer must go from the rush and stress to prepare a Board meeting at the end of each quarter, to talk about what they want to know; and then separately, into the performance management and business review sessions with our different teams in the business. This is now all nicely tied together, and the figures act as indicators on how much we are really on track in realising our strategy.”

You can also read more about our approach on value creation with private equity portfolio companies here