The Art & Science of Budgeting
A common mistake we see CPAs, CFOs and businesses all make is falling into the trap that budgeting is a 100% scientific exercise. The focus is on the past data, the industry outlooks, the economic trends, the grand plans of the sales team…and so on. It is generally an iterative process designed to come out to a top line growth and bottom-line number that everyone agrees on.
All told, it’s really a bunch of assumptions backed by consensus that everyone can live with.
Sounds harsh, doesn’t it?
Why the Scientific Part Fails
But it’s more common than not what actually happens. Here’s why:
CEOs/owners have expectations on what their business SHOULD be doing. That’s regardless of whether it’s actually capable of it or not.
Sales teams are inherently optimistic – whether driven by ego, compensation goals or actual past performance. They are often prodded by CEOs/owners to produce more than in the past.
Finance and accounting teams are inherently realistic (or pessimistic). It’s up to them to manage the backend including making sure there is enough profit and cash flow to make payroll and keep the vendors happy.
In the end, everyone reaches an agreement on what they can live with. We’re not talking about rampant enthusiasm or a plan that generates a cohesive focus. We’re talking about a financial plan that everyone just wanted to get done and doesn’t include anything that is impossible.
Frankly, this is also why so many companies see the traditional budgeting process and its outcome a waste of time and energy. And, the first time something about it doesn’t work, it gets mothballed for the remainder of the year.
It all likely started, in part, because budgeting is viewed as a 1) a financial exercise and 2) purely scientific or data-backed in nature. Those things are true AND so are the artistic elements.
Adding a Little Art
How can a financial plan composed entirely of numbers have anything artistic about it?
Because it is based on human inputs: The CEO vision. The sales team’s lofty aspirations. The management team’s commitment to being a “best in class” workplace.
Making those elements a key part of the budgeting process – instead of stand-alone items related to culture, sales quotas and HR initiatives – is what makes the end budget a key piece of what can drive companies forward. It becomes the embodiment of financial performance and company accomplishment. It can be a guiding light and not just a required financial exercise that is rarely used once it is completed.
Of course, adding a bit of art to the science isn’t the only thing that makes a budget better. There are all kinds of things that can help with that. Yet, knowing that you can look at a budget through a different lens can help you work with your clients to create one that gets used past January.
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