Planning is great, but budgeting???

by | Oct 13, 2020 | Finance, Leadership

It’s mid-October, and as I write this I’ve had an item on my to-do list for a month that says “Update 4th quarter plan”, and another that says, “Prepare 2021 plan”.  My brain tells me that I should do it, but I always seem to find something else that is supposedly more pressing to work on.

Why am I procrastinating about planning?  I know the benefits of a good plan, and it’s the first step of the powerful Plan-Do-Check-Adjust cycle.  So what is my problem?  I think the underlying reason is that 30 years of corporate America has taught me to conflate planning with budgeting. While the terms have a similar ring to them, they are different.  A plan describes what you’re going to do and the results you hope to achieve.  A budget is a detailed financial projection – usually for the next year.

I am not a fan of budgets.  To me, they are akin to formal performance reviews.  Nobody likes them, and they provide minimal value, but we all feel obligated to do them because, well, that’s how things work.  Budgets are usually very detailed, and they break revenues and spending into tiny little buckets of profit centers, cost centers, and general ledger accounts. This detail provides a high level of precision, but it doesn’t correlate to accuracy.  I’ve sat in too many leadership meetings where six months into the year we’re proclaiming, “The budget isn’t valid anymore.  Too much has changed.” The unfortunate truth is that it is hard to predict 12-15 months into the future.

While I don’t like budgets, I do like plans.  A plan clarifies priorities and sets the direction for the company.  There are always far more possible things to work on than an organization can implement.  Every organization has resource limits, and there needs to be priority and focus. Otherwise, the organization will wander down 100 different paths, working hard, but getting nowhere.

There are plans that cover a longer time period, perhaps one to three years, and these help to set the direction for the company.  However, my favorite plans are 3-month plans.  A 3-month horizon is fairly visible in most organizations, allowing for reasonable forecasting accuracy, and a 3-month horizon is action-oriented.  With priorities chosen, it’s time to get to work and implement them, because you only have three months, and that time can fly by quickly.   Lastly, a 3-month horizon allows an organization to shift when the world changes, and the world does change.  This year the pandemic has been the universal surprise, but you’ve probably experienced other budget-shaking changes in the past, such as:

  • Winning a new customer project that will consume almost all of your team
  • The loss of a key customer
  • A decision by ownership to sell the company
  • A new product introduction that is taking far longer than planned
  • New tax laws that are spiking certain commodity prices
  • And so on

All of these changes require adjustments by the leadership team.

So, after writing this blog, I’ve made a decision.  I’m not going to do a 2021 budget, but I will create a plan for the three years, 2021, and the remainder of the 4th quarter. My other commitment is to populate my calendar with quarterly 3-month planning sessions in the future so that I turn 3-month planning into a habit. I’ll do this by the October 23, and you can hold me accountable to that commitment.

You may not have the flexibility to choose not to do a budget.  You may need one for compliance reasons with a bank or your board of directors.  If that is your situation, I have two recommendations:

  • Do the planning first and make the budget the financial representation of your plans.
  • Keep the budgeting process simple and quick so that you can focus your energies on implementing your plan. Detail and precision will not lead to an accurate prediction of the future, particularly in times like these.

If you’d like to discuss this further, please reach out to me at:

Phone: 651-398-9280


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