Strategic Finance Advisor, CPA | Helping CEOs confidently lead with available, accurate, and actionable insights through world-class models | CEO at Raftel Strategy and Angel Investor
99% of CFOs Have Fallen Into 1 of These 3 Budgeting Traps: (1) The Frugal Non-Budgeting CFO (2) The Excessive Non-Budgeting CFO (3) The Copier Budget CFO Frugal Non-Budgeting CFO tells his employees that they are not allowed to spend anything without approval. Need new software? Get permission. Need it again next year? Get permission again. Frugal Non-Budgeting CFOs are extreme micromanagers all in the name of financial control. They stifle agency and ownership, leading to poor performance and employee attrition. Very inefficient (and costly)! Excessive Non-Budgeting CFO tells his employees they can spend anything whenever. On the upside, the Excessive Non-Budgeting CFO lets their teams operate independently with high ownership. The down side is, there is zero strategic guidance. Spending is completely unhinged and there are few (if any) audits on existing, recurring expenses. Very wasteful (and costly)! Copier Budget CFO copies the budgets from last year with minimal changes (like 5% increases for the heck of it). “If you don’t spend it, you lose it” is common, forcing teams to spend money so they have budget for next year. The benefits of this approach are clear - it’s quick, easy and budgets get approved fast without needing to convince the board. The problem is, the Copier Budget CFO incentivizes bad behavior by encouraging teams to max out their budgets. Also wasteful (and costly!) Which trap best describes your budgeting process? Don’t worry, there is a fourth option: The Strategy-based Budget CFO The Strategy-based Budget CFO sits with the executive team (and maybe the board) and starts with Strategy. What are our goals for next year? they ask. - Getting to X level of gross margins - Entering this new market - Releasing this new product Okay. Then they go to different teams and ask 3 key questions: (1) What is your core spending? (2) What do you need to spend to achieve our strategic goals? (3) If you had unlimited budget, what would you do? Now they have 3 levels of budgets for each team and can work with leadership to prioritize, invest, and allocate. I know some people like “zero-based” budgeting - when you tell teams they have no budget for next year and built it from scratch. That can be helpful, but it is very time consuming. That’s why I place my bets on the Strategy-based Budgeting CFO to build useful budgets that maximize revenue and minimize expenses for companies. Warning: For this to work effectively, your lines of communications must be trusted and open. Which approach do you use?
Great breakdown and process for strategy based budgets!
Resolve Your Business Challenges | Strategic Solutions for Companies and Nonprofits | Growth Specialist and Results-Driven Strategic Advisor | Expert Facilitator
6moStrategic budgeting is everything. This is great.