Budgeting can be an effective tool for profit improvement if done properly.  I learned that lesson when I started my career in Finance with General Foods, makers of Maxwell House Coffee and Jell-O Desserts.

We didn’t even call the annual budget a “budget,” we called it the “Operating Plan” and that tells you something about the whole improvement mentality, and the emphasis on planning for improvement.  This is especially so as this Operating Plan was required to be the first year of a five-year Strategic Plan, furthering the emphasis on improved results over time.

The Operating Plan was the outcome of some very spirited negotiations between each Divisional General Manager and the heads of Marketing, Sales, Operations and Engineering.    The financial function facilitated this whole process, which included pulling together an objective estimate of how the current fiscal year was likely to end up, since the Operating Plan was created in October, before the December year-end.   If the Operating Plan called for improved year-over-year results, it was grounded in real actions that were needed to make it happen.

As a consultant to small and mid-sized clients, I find I am having a chance to help them implement some of these best practices.  What I am often seeing is the budget is something that is mechanically put together by the controller or bookkeeper in January, by taking the past year actual results, and applying an across-the-board percentage increase.  Creating the budget this way is missing a big opportunity to engage all of the managers in a dialogue that can establish a shared vision for improved results as well as greater accountability for making it happen.