The Chemistry of Strategy tm Newsletter December 01, 2011

Budgeting as an effective strategic tool

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Italian merchants popularized double-entry accounting, the basis of budgeting, in the 1400s. Arguably, it was this innovation that enabled western Europe to catch up economically with, and ultimately outdistance, the rest of the world. Done well, budgeting can be an effective tool for executing your strategy.

I was asked about budgeting strategies following a recent presentation to a group of Chicago CEOs. "What's the best approach? Top-down or bottom-up?" The group's facilitator, Chris, immediately answered "bottom-up, of course, because it leads to your team being more creative." Ben, one of the attending CEOs, disagreed. "You will have a lot of angry people if you do it that way."

I strongly agreed with Ben. When I've done bottom-up budgeting in the past, I've ended up having my team submit expense budgets that added up to as much as three times revenue. Going back to them and asking them to cut their proposed budgets by as much as 80% made them more than angry. They reacted emotionally because they felt that their resources had been reduced, even when their final budget was 40% higher than the previous year's. They wasted a lot of energy complaining about losing resources that they never actually had in the first place.

I've found that a top-down, bottom-up approach works best. Start with a conservative revenue plan. For example, choose a revenue figure you have an 80% probability of exceeding, or a target that has been verified as reasonable by comparing it against last year's results, sales quotas, and/or market/product share. Once you have your revenue target for the year, establish percent-of-revenue objectives for the major categories. The first category to establish should always be profit. Never allow profit to be "what's left over." Then set the objectives. For example, you might say that to be competitive, G&A has to be under 11% of revenue, marketing has to be at least 20% of sales, etc.

Every major expense category should have an accountable executive. You might tell your CFO: "You need to support the business with G&A under 11% of revenue. Be a good steward of those expense dollars and put together the best tactical plan and budget to support our short- and long-term goals."

Once you have the first version of the budget, you can fine-tune the trade-offs. People work best if you make it clear what the acceptable outcomes are and then empower them to create and execute a tactical plan to achieve those outcomes.

As for Chris' thought about generating creativity, one approach used in a Department of Defense agency where I worked was to periodically ask the question, "If you had another chunk of cash to invest this year, what would you do with it?" You could integrate this approach with your budgeting process and see what your team comes up with.

Create a strategic plan with your team

"Management is doing things right,
leadership is doing the right things."
-Peter Drucker

How long have you been saying that you are going to develop your strategic plan, but you haven't yet done so? Why? Perhaps it remains on your to-do list because it feels like a huge, laborious process and you haven't the time to spare to do it. Peak performing companies have a clearly defined strategic plan…and it doesn't have to take long to create an effective one.

Your executive team costs you over a million dollars a year. Are you fully utilizing them? It's a waste of time and money to create a plan that they don't own and implement.

John W. Myrna

is co-founder of
Myrna Associates Inc

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by Ken Blanchard

It isn't good enough to have satisfied customers; you need raving fans.

Raving fans are so thrilled about your service that they feel compelled to convince everyone they run into to buy from you.

This 1993 classic is a quick read with the potential to change the culture of your organization "overnight."

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