November 2, 2021
Keeping Budgets Relevant – the “What, Who, Why” Methodology
By David Conrad
Budgeting is a key part of every business. As your business grows, the need for a relevant budget supported by a robust budgeting process becomes more critical. This article aims to help growing small to mid-sized companies keep their budgets relevant and improve their budgeting process by introducing the What, Who and Why Methodology, which focuses on developing budgets from the ground up rather than focusing on historical data. This will help your budgets to align to strategic goals and help to drive better performance in a growing company.
Why is this method needed?
First and foremost, if your company is growing, it is imperative that you leverage your costs to grow profits and improve margins. This method helps you asks the critical questions, “why do I really need to spend on this?”; and “how is this cost going to help me reach my financial goals?”
Second, too often the budget is developed using the past as a proxy instead of focusing on the drivers of future results and the related costs. The COVID pandemic is an example of why using the past as a proxy can be a misstep – COVID changed small to mid-sized companies’ sales, payrolls and lists of trusted vendors. Meaning, COVID made the traditional budgeting method of looking at what you spent in one year and growing that number (or reducing it) by a certain percentage a less effective approach.
Third, in smaller companies without a defined budget process, department heads often ask accounting how much money they can spend in the next year. For example, the CEO or Board of Directors may set a revenue target, or the sales team may provide these projections. At that point, it is not the accountant’s job to divide up the spoils to the departments. They shouldn’t say, here is $50,000 or $100,000 or $1,000,000 “spend it wisely”. The process of budgeting should help align the projects, improvements, and personnel planning with the overall company strategic goals.
The What, Who and Why Methodology
The What, Who and Why Methodology focuses on department heads/budget owners asking the right questions to drive accuracy and accountability:
What? – This question applies to all budget aspects – including what goods or services you plan to buy, what resources you need to hire, what technology improvements you need to implement, and what manufacturing capacity you need to enhance. Always plan for these resources with the overall company strategy for the coming year in mind. Ensure you include timing, vendor, skills, quantity, and price in your estimates.
Who? – This question focuses on accountability. Not only who will do the purchasing/hiring but who is ultimately responsible for implementation, onboarding, and project success. There should always be one person who has the ultimate responsibility for a purchase/project because when no one is in charge, everyone is, and when everyone is in charge…no one is.
Why? – This is likely the most crucial question because it requires the requestor to justify what they are purchasing and ensuring it aligns to company goals. If someone cannot adequately justify the necessity for a purchase/new hire/project, and how the timing aligns to the strategy, then it should not be included in the budget.
How Can Bridgepoint Help with Budgeting?
The methodology introduced here is meant to challenge the status quo to help your dynamic company set the right path for a successful fiscal year. If your company needs further assistance with budgeting, Bridgepoint Consulting is here to help. Interested in learning more? Reach out today.