Every year, good business executives develop a budget. Peek into
planning sessions and operating mode of any well-run company and you will find a strong budgetary process at work.Simply put, a budget is a financial tool -- sort of a "spending-guide'. But, it can also be a healthy discipline forcing company to think and constructively debate investments and priorities for coming year. As such, senior executives should demand a tight alignment of corporate goals to annual budget. A well-developed budget puts into place necessary structure to measure, manage and control variety of spending within enterprise. Savvy company leaders also utilize budget process to communicate to rest of company priority of various projects as well as amount and timing of funds allocated. The annual budget and its monthly review and quarterly updates memorialize and documents companies financial intentions for coming year. This fulfills a requirement demanded by most banks and lending institutions.
However, there is an inherent trap that most companies fall into when developing yearly budgets. And it is so insidious and subtle, that most senior executives unwittingly become part of this annual charade without realizing it. Global Marketing calls it ‘creep-factor'.
What is creep-factor? Some clients of Global Marketing have guessed it is an apt description of their firm's newly hired CFO. Some have indicated that, as in likes of ENRON, WorldCom and etc., it must be a new method that defines profit. And others thought it might be a ratio of lost customer revenue to firm's competitor. All reasonable guesses, but none correct!
Global Marketing Inc. has many clients and sooner or later topic turns to ideas on cost-cutting measures. At this point Global Marketing team asks to review summary budget schedule for past 3 years. All key expense items are analyzed with budgeted increases from previous years highlighted. With few exceptions, we find that budgets grow (creep) by 5-12% per year usually without an increase in revenue (shipments) line. And even if top line does increase, this only temporarily masks expense increase and inevitable cost-cutting sessions to come.
