It’s the beginning of 2015, a new budget year for many businesses. That often means the start of another painful year of trying to live with a bunch of made-up numbers, which--in all likelihood--weren't really of your own making. They’re driven by all kinds of external considerations, including but not limited to the needs and demands of investors, and, frankly, by the seemingly universal belief that every new year’s numbers need to be bigger and better than the prior year.
So you can either look forward to 12 more months of trying to make someone else’s dreams (or delusions) come true, or you can have some honest conversations with the appropriate parties and make some simple adjustments in your projections and budgets that will make everyone’s lives a lot easier and will ultimately lead to better results.
Of course, I understand the need for ongoing growth (although some companies these days would do a lot better to slow down their growth efforts until they could convincingly demonstrate there was a profitable bottom line), and I also appreciate how the whole annual planning “process” works as well as anyone. My problem isn’t with the basic procedures; it’s with the sorely misguided underlying assumptions.
Many founders go about the budgeting process in the same way each season and yet never seem to learn--even with the demonstrable results staring them right in the face year after year--that: (a) not every aspect of any business can be defined, measured, and documented in the same way and (b) not everything in a business can be predicted with mathematical precision, because sometimes the world and the people in it just have other plans. But everyone plays the same game of making forecasts and the numbers get generated--and that’s when the real problems start. Because even though you know that these are “best guesses,” too many people on the outside take them for gospel.
So, is there a better way? I think so. Especially when you are dealing with matters that are beyond anyone’s ability to predict, you need to admit that simple fact and adopt what I like to call the “fence it and forget it” approach. It’s straightforward; it leads to results which are likely to be far closer to the eventual truth; and makes it much easier for everyone to get a good night’s sleep, because they’re not worrying about things they can’t really do anything about.
Let me give you two examples from different ends of the spectrum.
Case One: A Church Soup Kitchen
Yep, even a church needs to have a budget and watch its expenses. But when it’s crunch time and it’s freezing cold outside, no one gets turned away--regardless of the budget or the best laid plans. And so, year after year, the end is always the same: It’s "shame on the operators," because it ended up costing more than they had planned to feed all the folks who showed up. Of course, everyone knows that no one knows how many folks you’re gonna have to feed until the year’s over. But nonetheless, the board blames you for spending too much.
Case Two: A Sales-Driven Business
No one ever said it was easy to manage your sales team’s T & E budget or to make sure that every meal or every trip really mattered to the sale. And you can drive yourself and your team crazy sweating the small stuff like this. But worrying about whether $50,000 over the course of a year is going to be pissed away on drinks and dinners when you’re trying to make your company’s first $15 million year in revenue is a waste of your time (which--when well-spent--is probably worth a lot more than the measly $50k).
So what’s the solution in both cases? You’re worried about the sales guys taking too many trips? Take your best guess at what the costs should be--add 5 percent to be safe--and tell the sales team that that’s all they get for the year, and it’s on them to make it work. Same deal for the soup kitchen: Try your best to estimate the volumes and the costs, add a small cushion, and you’re done. That’s the number, and now it’s mainly in God’s hands.
What have you done? You put the problem in a box--you fenced it in--and then you were able to forget about it and focus on the much more important things that really matter. You've got to learn to live with some conscious and intentional ambiguity in your business if you want to make it better in the long run. You can’t sweat all the small stuff. We don’t know everything, we can’t predict everything, and we can’t control everything. (And wouldn’t that be boring anyway?) Get over it and pay attention to the important stuff and to the places where you can make a real difference.
The Fence-It-And-Forget-It Approach
- Pick some categories and determine a budget number for each--your very best guess. Put the numbers out there for the team.
- Make it clear that these are serious numbers (but not written in stone), and that you expect everyone on the team to live with these numbers and try to make them real. But you don’t kid yourself or them about it or obsess about it every day.
- Let the chips fall where they may throughout the year and spend your days doing what really matters.
- Next year, you can take a look back and see whether the numbers need adjusting. It never hurts to be a better estimator.
- Congratulate yourself on how much less stressful your day seems now that you're not concerned with policing all these petty matters or worried about a few bucks one way or the other--because that’s all these things will ever mean to your bottom line.
Here's why it works: First, you put an end to all the false precision and made-up metrics that used to creep into your budgets and destroy your credibility. Once everyone knows that no one knows for sure, it’s a lot easier for people to put their heads down and go for the gold, because everyone’s in the same boat pulling in the same direction.
Second, it gives your team the clear message that you have confidence in them and that you trust them to make the right choices and decisions in the moment. And yet, because it’s a real plan and a real budget, everyone can buy into it and take ownership for the numbers--not lay them off as someone else’s concern--and “owners” at any level in your business are exactly the folks you want minding the stores and pinching the pennies whenever they can.
Third, you do it because you’ve got much bigger fish to fry. No one likes to waste money--whoever’s money it is--and so when you see that kind of behavior going on in your business, it’s not about the money. It’s a message to you and the rest of management that those folks don’t feel good about the business, and that’s the real problem that you’ve got to fix. But you won’t see it or be able to fix it if you are wandering through the weeds worried about nickels and dimes.