Three Budgets Are Better than One… Baby Steps Will Get You to None!

I am writing this blog form Jackson, Wyo., in the shadows of the Grand Tetons, where I have enjoyed an excellent Spring Break trip with my family. The beauty of the mountains and the wildlife (elk, moose, Canadian geese, and dozens more) gave me time and space to reflect.

It wasn’t all fun, however as we took our kids skiing (for some of us, the outing marked the first time on the big mountains). It had been over 20 years since I had tried to ski. My wife said it would be like riding a bicycle – You’ll pick it back up instantly. I never remember being that terrified when riding a bike.

We spent most of the first day with a patient instructor who walked us through a series of baby steps, each instruction building on the one he presented previously. By the end of the day, those baby steps made us confident enough to try the big slope on our own.

I see the majority of North American companies implementing the Beyond Budgeting principles in a similar fashion.

They are taking a deliberate, evolutionary approach as opposed to the revolutionary move of eliminating the traditional budgeting process in one fell swoop. By doing so, they tailor their implementation to use the Beyond Budgeting principles to address the unique culture and qualities of their organizations.

This brings to mind a conversation I had with Dr. Charles Horngren, who is Stanford University’s Edmund W. Littlefield Professor of Accounting Emeritus and Beyond Budgeting Round Table North America’s academic advisor. Dr. Horngren advised you can’t just look at the tool or the methodology — you have to look at the culture, the execution, the market, and other external forces.

In our efforts to expand the reach of the Beyond Budgeting Round Table, we have been investigating partners who already serve that market. One of these partners is American Express, which implemented the Beyond Budgeting concepts in 2003. Their baby steps resulted in better planning and control as well as the eventual elimination of their traditional budgets in 2005. Amex’s Open Small Business site features a blog entry by Trent Hamm, who focuses on personal finance. I thought of the value of baby steps as I read his account of an iterative approach to addressing the inadequacy of traditional budgeting on a smaller level.

Hamm reports that he creates three budgets to be better equipped to adapt to changing external conditions. The first budget is based on a sunny revenue forecast with corresponding expense levels; the second reflects a worst-case revenue scenario that requires him to identify where he will cut back to survive a worst-case approach. The third budget consists of an average of the best-case and worst-case scenarios.

This approach, Hamm asserts, forces me to think about these questions outside of the heat of the moment.

If I were to just stick with the sunny budget and have a revenue shortfall, I would be prone to poor decisions because of the emotion of the moment, Hamm continues. However, if I already have a well-considered plan in place for just that event, I would be able to just move to the more conservative budget and not open myself up to irrational decision-making.

If you read my blog regularly, you’ve probably forecasted (accurately) that this is the point when I pose a soul-searching question: How many of you feel that your departments and companies are prone to irrational decision-making due to inflexible budgeting activities?

If you nodded, please keep in mind that you don’t necessarily need to strive for a revolutionary transformation. Baby steps work just fine – and they can be less terrifying than a more revolutionary approach.

After you have tried Hamm’s three-budget approach, you can follow our suggestions to expand scenarios as we discuss in his new book Future Ready: How to Master Business Forecasting. You will also learn that the budget is an accounting fiction that can be replaced by relative targets, rewards with hindsight, driver-based rolling forecasts, and a more continuous planning and control system. Then you can eliminate the three budgets and have more time to reflect on the value you can add to your company.