Great Business Ideas: Rethinking the budget

Great Small Business Ideas to Start: Rethinking the budget

Is budgeting an indispensable, practical tool for effective management? Or is it a corporate ritual and hassle that far outweighs any benefit it provides? There is a third view: that it is useful, but only up to a point, and that by rethinking the budget a firm can dramatically improve its financial management.

The idea

Diageo was created following the 1997 merger between Guinness and GrandMet FMCG. Following the merger, 60 finance managers from across the business met to discuss how they could best serve their shareholders in the future. Overwhelmingly, the response was to “blow up the budget.” The feeling was that the budget process consumed vast resources, it took too much time, and its one-size- fits-all approach took too little account of each individual business.

There was little benefit for the shareholders in this detailed process (which is typical of many corporations). The budgeting exercise was seen as a game, and managers believed that shareholders were not concerned with assessing performance against arbitrarily agreed targets, but with whether the company was worth more this year than last.
There was a feeling that something had to be done—people were wasting too much time and money.

The finance department began to:

  • Streamline the existing system.
  • Move to an integrated strategic and annual planning process built around key performance indicators (KPIs) and, crucially, rolling forecasts.
  • Emphasize strategy-driven KPIs rather than simply measuring performance against budget.

This ensured that people at every level and position had relevant metrics—measures of their individual and team performance— while giving the board the right information. The same data, slightly modified, enabled business units to operate productively.

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Diageo preferred performance indicators that were externally oriented and forward-looking, rather than historical or internally focused measures. The result was a management focus that instead of dwelling on presentations of past figures and performance was more concerned with resolving business issues and preparing for the future. The previously unsung talents of finance experts made this inevitable: they had more to offer than simply tallying past events.

Other business leaders, and in particular shareholders, want finance personnel to help them get the greatest value from every asset— including the expertise in their finance department.

In practice

  • Consider moving to a rolling budget, rather than a massive annual upheaval.
  • Measure more than finances. Regularly review the issues that have a major impact on your business, such as number of customers acquired or lost, marketing effectiveness, and employee engagement and productivity.
  • Gain support from the top of the business and also ensure that the new approach is as inclusive and widely supported as possible.
  • Look outside the business for information, ideas, and insight.

Find expertise among people that have made their budgets more dynamic, practical, and relevant.