The Algorithm Blog

The Dangers of Budgets Developed without Strategy


Rarely has a budget been seen in a positive light.  In personal finance, it is just a yoke that keeps you from doing the things you want like taking a vacation or buying a fishing boat. 

In business, it is just an annual, time-consuming exercise that often yields little more than a hammer for your manager to use to justify declining your conference request. 

Or it becomes a tool for the sales manager to stir up the sales force that hasn’t “made their numbers”.  I am willing to go out on a limb and say that those budgets probably follow the traditional process of “last year + 10% on revenue and 5% on expenses” method.  They are just meaningless numbers on a spreadsheet.

How Much vs. How To (Strategy)

Budgets that are “just numbers” provide guidance on how much to spend, but little guidance on how to spend

To give your budget true power, you need to tie it to strategy.  For example, “Our strategy is to grow the business by increasing sales by 10%”.  Nice goal, not strategy.

Strategy is the plan on how you are going to increase sales by that 10%.   It may be penetrating a new market, maybe increasing repeat business or launching new products.  It’s the way a company creates or maintains a competitive advantage and correlates that to sales and operating activities.  Those activities will require certain inputs to produce the necessary outcomes.  That is the framework you build a budget on.

Creating a True Strategy Framework

Budget Strategy ScaleA few years ago, I decided I wanted to lose 20 lbs in 4 months.  I would have been more successful if I had created a plan of exercise, portion control and probably dietary changes. But, I knew the goal and the things that would help me lose the weight. 

I simply used my scale and weighed every Monday morning, i.e. checking my progress against my budget, it ended one of two ways. 

First, I saw that after two months I have only lost 6 pounds and I may have adjusted my goal, reforecast. Or, second, I may have been tired of missing my mark, stopped measuring and justified my overspend on pizza.  Things changed I didn’t anticipate.

By implementing an operating plan based on strategy, you can measure the activities that will lead to success, and those aren’t just financial.  If a goal is to increase your customer base by 10%, you know certain activities will help drive that result.  Things like increasing marketing, increasing prospect touches and converting more leads.  Those things are all tangible. 

You can measure your marketing activities and estimate the costs to achieve your goals, you can measure the number of contacts with prospects, and you can measure your conversion rates.  By creating measurements on these activities, you can have an idea that you are doing the things and utilizing the resources it will take to reach the goal.  You can’t do that if you only have a dollar amount to tell you how much you can spend.

There are “best practices” for building a budget which will be discussed in my upcoming article.  But to make your budget create maximum benefit, the first step isn’t about budgeting at all.  The old saying goes, “Plan the work. Work the plan”.  The key is the plan. 

I am always interested in learning from others.  Please let me know if you agree, disagree, or have questions in the comments below.  I am here to help!

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