The annual budgeting process for large public companies is crazy. Literally. It’s an exercise in kool-aid drinking minus the charismatic leader. It typically ends with a bunch of otherwise smart people jointly deciding on a P&L for their business that has a very loose connection to reality. Each person knows that this is so. But somehow reality seems so drab compared to the fantasy that they create.
Many people have written and spoken about this process. Jack Welch is one of the more famous. I’d like to propose one way of thinking about annual budgeting that might ground these budgets more deeply in some bedrock of reality and inspire the sorts of actions that could really drive businesses forward. I’d like to start with a few simple ideas:
- The world changes. Pretty much constantly. And it doesn’t always announce what those changes are. Even after the fact.
- Big companies do not control the universe. Even if they have really nice logos. Even if they are listed as one of the top 100 employers for working women.
Where does that take me? Well it takes me to an argument that what you had last year does not exist any longer. If you sold $100 million of your widgets last year, you don’t start the year with that $100 million guaranteed in any way. Not even the first dollar of it. In fact, that $100 million doesn’t really exist. Sure, the money exists. The customers are still alive (though they may have changed a lot). But there isn’t a pot of money waiting to be spent on your widgets or even in your market. Why not? Well, I told you above. The world changes and you don’t control it. Just because people liked or needed your widgets last year doesn’t mean they will this year. (Note: If you have contracts or you sell to businesses that have budgeted for your widgets then my point is a bit less true, but read on. You still need to understand the implications of my argument because budgets can be cut and contracts can be broken.)
Imagine that you start the year with nothing. That you have to earn each and every dollar through your actions. What would you do differently than you would if you assumed that your sales next year would be whatever you had last year (as if it was still out there just waiting for you) plus whatever growth factor you decided Wall Street needed to see from you?
I think you would understand that there is one key to success: giving your customers the best damn widget in the world. Just absolutely blowing their minds with how good your widgets are.
If you start your budgeting based off of what you had last year, then the need to blow the minds of your customers seems less important. Why spend $5 million to improve your widget if it will only bring in $1 million if incremental sales? But if you assume that you will sell nothing unless you improve your widget then that $5 million spend gets you $101 million in sales. That is, blowing the minds of your customers allows you to sell dollar one.
In brief: Businesses need to drop the sense of entitlement. You are not entitled to have customers. You are not entitled to make money. You earn your customers and your sales each and every second by behaving in a manner that is worthy of customers and sales. This is your only path to success.
There may be a sense of comfort in the kool-aid approach. You’re surrounded by smart successful people and none of them seem to reject the fiction so maybe it’s not fiction. But here’s the problem: The kool-aid only works during planning season. At the end of the fiscal year, the numbers will be what they are and no amount of kool-aid will improve them. Far better to accept the cold hard reality that your success depends on constant outstanding delivery to your customers. No kool-aid required.
