Budgets that Damage - The Downsides of Making the Numbers


In my organisational career, I had budgets from the age of 22 to 47. I lived and breathed them and many times, budgets, the gospel that they were, caused havoc, albeit within the corporate retailer framework that I worked.

Here are two examples of the damage caused.

Example One

Typically budgets were initially discussed in January, just after the Christmas rush. They were always dependent on year-on-year sales growth and at the time in question, individual businesses were not expected to deliver 'profits', as the way the business was structured was not capable of sustaining that level of information.

So the budget got signed off about May (for the fiscal year staring the April a month before!). Monthly sales budgets were built, usually to a corporate model, as were cost budgets, the biggest of all being salary costs. Half year budgets had to be met and so by the time September's costs were in, you were well into planning your Christmas.

One year, after a review of performance of the organisation as a whole at the half year, a decision was made to radically trim salary budgets for the rest of the year. Out of 20 businesses in my geographical region, 8 were told to cut costs dramatically from November onwards. Because of the way that employment legislation works in the UK, you can't just lay people off. So we had to find a better way to cut costs, just before Christmas (and at that time, the only two months the organisation made any profits to speak of were in November and December!)

It was decided to reduce the hours of every member of my staff (some 125 people) by 9.9% (apart, much to my personal disagreement, from the management team, who would be under 'much greater pressure', so would maintain their hours (and salary)). Although I say it myself, I had a great relationship with my team, and everyone made matters much easier by complying with the 'request' within days (instead of the statutory notice-period, which for some could have been up to 12 weeks). My people were rock solid in how they put themselves forward and I was humbled.

But my Christmas business was badly damaged. The most profitable time of the year was damaged, badly and when the sums were added up, we lost 'profit', as far as I could calculate. The organisation's reputation was in tatters - and for what. Driving to achieve the budget, and more importantly keeping a lid on costs!

Example Two

My second example is the same organisation, bang up-to-date. Like right now, December 2004.

A manager is promoted in July 2004, to a very difficult store to manage - rather beyond his capability really. He inherits a budget cost overspend and is told to recover it by the end of the fiscal year (March 2005). He decides to cut back drastically on anything he can cut his staff costs on. So he 'cancels' Christmas recruitment and plans no extras for the busiest period of the year. Admitted, not the only period they now make a profit on, but still very, very important to their profitability, for the year.

Things go badly wrong:-

    * Systems fall apart.
    * Preparation of merchandise for Christmas is too late.
    * Staff morale plummets.
    * People leave.
    * Absense levels rise.
    * He becomes depressed.
    * He makes some serious lapses of judgement, because of the pressure.
    * He is disciplined and demoted.
    * Another manager (the fourth in five years) is brought in.
    * There is a severe underperformance in sales (est. £50-100,000 for the period)
    * The manager's confidence is ruined, forever.

All to meet the budget...

He's not a bad guy, in fact he has worked his socks off. With support and guidance he could have made this work and then progress his career. He was given none of these, except told that he had to make the budget. The article goes on to say that rather than performing to a pre-written script, managers are far better when they work towards forecasting more and more accurately on a rolling (and, over time, learning) basis. Performance and results become a lot more honest, realistic and outwardly (i.e. customer) focused, rather than inwardly (i.e. how to avoid or 'cheat' the budgeting system).

Perfect solution?

Maybe. It's just the nagging fear I have that the organisation anonymously mentioned in the article, with the solution above, might be the one I've been talking about in my examples...

Martin Haworth is a Business and Management Coach. He works worldwide, mainly by phone, with small business owners, managers and corporate leaders. He has hundreds of hints, tips and ideas at his website and specifically on budgeting at http://www.coaching-businesses-to-success.com/budgeting. (Note to editors. Please leave a live link when using this article - thank you!)

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