Exactly why I hate budgets

Strategy is strategy. Tactics are 100% about one question: What is the next right thing to do? Budgets just get in the way and stop you learning.

Yet another pushy reminder about Project Two. I now have 70 contributions and I would love you to add to that number via the simple form, email, whatsapp +44 7864 749216 or by commenting here.

I am in an especially grumpy old man mood this week. Mainly due to the structural failings and frustrations of our innovation ecosystems. That will be somewhat improved by some wonderful golf ahead in Wales and Southern England.

Meantime, I have been thinking for a while that I might share occasional posts about some of the things in business that really bug me. This is the first in what may become an occasional series.

This is exactly why I hate budgets

What's changed?

Why is this number different from budget?

Two simple questions.

The second question doesn't matter. Unless it answers the first.

(Incidentally, if you don't believe the first question is powerful, consider this. PwC and the rest of the big 4 have built their entire businesses on answering this question in various ways. Audit, tax, consulting, risk - everything.)

Budgets are simply a prediction based on your knowledge at a point in time.

So the answer to the first question is always: "Because things didn't turn out as we predicted."

What if we asked a different question about budgets? What if we said: "Why is this number the same as the budget?"

It turns out the answer would still be: "Because things didn't turn out as we predicted." With the qualifier: "but those changes offset so the net outcome was the same."

Budgets just get in the way of answering "what's changed?"

When you focus on budget variances, you are not learning and not even looking for the things to learn.

It creates a defensive and negative mindset. Of course things didn't turn out as predicted. They never do. So what?

Making me defend my prediction is not "holding people accountable". It's asking for miracles and then wasting time explaining why they didn't happen.

The key decision in business is always "what is the next right thing to do?"

We think ahead and make predictions about the future to help us make that choice.

There is nothing wrong with that. It is the fundamental evolutionary advantage that enabled humans to emerge from the African savannah and not just conquer but completely reshape the world.

I quoted Eisenhower on this subject last time. Maybe you prefer the Mike Tyson version:

"Everyone has a plan until they get punched in the mouth."

So when we compare this month to the budget we set one, two or however many months ago, one thing will always have changed. We will always know more than we did when we made those predictions.

If you have already been smacked in the mouth, maybe you should try to dodge the next punch, not walk straight into it.

Sometimes this will lead to the same outcomes. "Sales are down because that marketing idea didn't work, so we need to try something different."

More often than not budget discussions go something like this:

"Why are sales X% below budget?"

"Well we tried our hardest and we are A% up on last month. But the budget was always a stretch goal."

"OK, we need to try harder and really focus on those goals."

I know plenty of managers, non-exec directors and investors who feel better for saying this type of thing. When these people are speaking, my advice is to catch a few minutes of shuteye until they finish. Because you are not going to gain anything from the conversation.

What's changed?

Or if you prefer the longer version: What do we know now that we didn't know before?

And based on that, what is the next right thing to do?

Strategy is strategy. Tactics are 100% about that question: What is the next right thing to do?