Budgets themselves aren’t the problem, but the budget process in most organizations is counterproductive. Traditional budgeting doesn’t facilitate financial tracking or goal-setting.
In addition, people are rewarded for spending their full allotments. Budgeting also wastes time and causes angst, as managers are second-guessed and questioned about minor expenditures and small spending variances beyond their control. Responsibility is diffused, leading to finger pointing. Annual budget processes also slow decision making, delaying projects as long as a year.
What to do instead? To make budgeting honest and effective, those with budget responsibility would do well to follow these six steps:
- Take the “annual” out of budgeting. The pace of business is too fast and conditions are too fluid for 12-month cycles, so review and update budgets on a monthly basis. This limits the shock of unexpected expenses and allows for incremental fine-tuning for a better end game. It also encourages ongoing conversations on how money is being spent.
- Seek continuous input from everyone. Engage front-line employees—those who spend the funds—in generating ideas on how to operate more efficiently and effectively. They also may have thoughts on creating new revenue. This involvement will demonstrate your trust and instill a sense of ownership for solutions and outcomes. Positive reinforcement and engagement are built into the process.
- Develop solutions; don’t blame. Ask your teams, “How can you achieve this result with less money while saving time and other resources?” Such discussion motivates employees to take immediate action for the common good.
- Visually reflect progress. Have your work teams display and track their collective budget progress publicly and monitor individual accomplishments privately. That way, people will always know how they’re doing. For example, the posting of visual feedback by a Dollar General distribution center led to dramatic and sustained savings from improved inventory management.
- Reinforce behaviors as you go. Talk frequently with employees about how and what they are doing. Focus on the behaviors they use to create results. Recognize their progress, and coach them when necessary.
- Celebrate achievements. Recognize the value of employees who save money or bring in new revenue. Consider offering an incentive by letting teams use part of their savings in the next budget cycle—perhaps for a celebration, new equipment or a bonus. For instance, one of our clients’ front-line employees suggested ways to eliminate costs. The company then used those cost savings to pay for paving their parking lot, based on a request from the employees. Also, hold a meeting at which employees describe how they accomplished their results. This practice enables people to brag in a socially acceptable way and share ideas that others can adopt.
As the traditional budget season arrives, consider making budgeting a year-round endeavor, and use these tips to implement a productive, sincere, collaborative process. Importantly, include all employees as active participants—and prepare for improvement.