Budget control needs meaningful control elements to be effective . Nobody can manage money. We manage decisions that lead us to spend. Thus, we can mange decision makers only. Therefore, we must identify the focus of our decisions—control elements that affect spending in the budget. This might be the decision to buy a car, build a factory, buy materials, and so on.
So, what is a budget? A budget is merely a firm’s best estimates of resources needed to achieve distinct goals in a specific future period—normally one year. It’s part of a firm’s stewardship activities. It’s counting the cost before acting described in Luke 14:28-33.
A budget is a needed part of PEACE Budgetary Control (PEACE), described in The New Managing God’s Money-The Basics. Generally, a business produces capital and operating budgets. Together, they show the business’ expected cash flow. Principles to develop each of the two budgets are similar. However, my later comments refer directly to the yearly operating budget.
The budget helps to allocate scarce resources. Still, viewed incorrectly, it can restrain managers if they see it strictly as a financial tool. And because it deals with the future, it will be ‘wrong.’ Even so, that’s not an issue. We budget mainly to identify opportunities and challenges ahead, so we can plan to deal with them dynamically.
One of the finance division’s roles is to help the firm achieve its mission. Thus, where feasible, it must fund qualified non budgeted projects that pop up during the budget period. Many finance executives block these ventures and do not attempt to find ethical, creative ways to fund them. Instead, they regard the budget as static and a strait jacket.
Before a firm starts to budget, it needs to be clear in five areas: Its mission, overall guiding principles, major assumptions needed, critical control elements, and important goals it plans to do in the budget period.
Mission, Guiding Principles, Key Assumptions
Everything a firm does must help it carry out its mission. That’s why it must ensure budget goals fit its mission and principles. If there is a debt ceiling, the budget must not exceed it. As well, the budget should comply with the firm’s stewardship and accountability rules.
Deciding main assumptions could be a stumbling block. What might be the state of the economy? How many students are likely to enrol next semester? What price might our products attract? What’s the likely inflation rate? These are a few of many decisions the business’ executives and managers must decide. Mathematical models, consultants, technical papers, and other sources can help, but the executive team must choose.
Control Elements Key to Effective Budget Control
Normally, the budget produces figures—revenues, expenses, balance sheets, cash flow— that managers and executives try, but fail, to ‘control.’ Unconsciously, they don’t realize that to control these numbers they must focus on input elements that produce them. Before doing the budget, front line and other managers need to identify critical control elements that’s key to effective budget control. These are inputs to track during the budget period.
A private school with a 2,000-student enrolment goal must identify tasks to achieve that number: marketing, visits to specific organizations, presentations, and so on. But it doesn’t end there. The school must assign these tasks to individuals and teams and review their performance regularly—daily, weekly, monthly, as relevant. Firms must understand success is identifying and monitoring control elements systematically. Control elements are major inputs that affect the firm’s targets.
Businesses should ensure the right people and teams have responsibilities for the right control elements. People must be responsible and accountable for costs they influence. We control behaviours, not costs. That’s why firms should be careful how they allocate service departments’ expenses.
Organizations might have maintenance, IT, transport, and other service departments. Where should be the control focus? User departments or service providers? Demand for services originate in user departments. However, generally, providers control these activities, and should bear their costs.
Sometimes it might be effective to develop shared goals with service departments and their major internal customers.
The firm must remind itself of its mission, overall guiding principles, major assumptions needed, and critical control elements. Then, and only then, is the organization ready to consider goals for the budget period.
A goal is the destination—what the firm plans to do during the period. Settle these before rushing ahead to work out budget details. Though it is wise to ensure enough resources exist in the budget to carry out approved goals, followers of Jesus need to lean on Him for guidance. We must be open to His intervention and be ready to start the period without a fully funded budget. But, beware; this needs a constant daily walk with the Lord to hear His voice.
The goal must be clear, complete, concise, and computable as in Exodus 3:10 and Acts 9:15-16. I agree with Richard Foster: goals need to be discovered, not created. Ideally, we should get them from our Lord.
The plan represents the steps to do the goal and must be specific, staged, simple and sensitive as in Exodus 26-31. It should be specific to particular goals, and show stages, or steps needed to do each goal. Plans need to be simple so others can follow them clearly. Most of all, organizations should remember they work with and through people, and so plans must be sensitive to people involved.
Building the Tabernacle, the Ark, the Temple each had plans prescribed by the Lord with perfect estimates. However, our estimates to do our plans will be wrong because they deal with the future that God alone knows. Still, firms must do their best to set likely costs of the steps to do their plans. Each estimate should be realistic, reviewable, and reflect the organization’s principles.
Goals, plans and estimates constitute the budgeting stage of PEACE. Next comes the control phase: act, compare, execute. After the estimating stage, as the Nike commercial says: “Just do it!” Often, people disconnect the budget from their actions mainly because many firms do not see the budget as an active, dynamic document.
This is most challenging and the part many organizations overlook. Therefore, firms need good systems to help compare budgeted control elements with results. They should do this as often as needed. Some control elements might need daily action, others, less frequent. The control phase is where the organization sees how it is doing versus plan and budget.
Sadly, when conditions change, such as assumptions, many firms tend to follow the budget blindly, instead of reviewing where they are and how they need to change. The budget is a guide. People control it!
The comparing phase will show whether there is need to change behaviours to stay with estimated time and costs to achieve goals. Normally, departments must change how they function to finish the journey on time and on cost. Remember, individuals’ decisions influence costs.
Budget Control Time line
In over 30 years participating in every part of the budgeting process in a major corporation, I have never seen a budget done once and accepted. The process is iterative. I suggest it should start in September and end in November. In the following year, I suggest regular formal reviews as relevant.
I have seen more games played with budgets than in the Olympics! People want there own way–they want to add to last’s years budget and key spending. That’s why I believe in zero-based budgeting, not incremental budgeting—adding to last year’s dollars. As well, I believe in stressing control elements that create spending, not money values that result from our decisions. Most of all, I believe each department’s budget is unique, and so, I shun ‘across the board’ decisions.
When firms decide to reduce spending, the primary focus must be on goals and plans; not money. They should ‘cut’ activities, programs, functions, projects—they must look at cost drivers. They should never ‘cut costs’ of all departments by a fixed percentage. That’s a sub optimal approach that encourages poor stewardship, and budget games!
The main reason to budget is to discharge the firm’s stewardship and accountability roles effectively. The budget is a tool, and like all tools, it has benefits, and shortcomings. Organizations must understand people decide, budgets don’t. People’s actions influence costs, budgets don’t. Without motivated people the organization will flounder.
Applying PEACE Budgetary Control systematically, methodically, and consistently will help a firm become a better steward of its resources and increase the chance of achieving its mission regularly.
© 2014, Michel A. Bell