It’s here, and there’s no time to delay it any longer. It’s time to create budgets for next year. Each division, each department, in short everyone wants more money than they got last year. They have new ideas and needs. The Harvard Business Review performed an analysis of the best practices in dozens of companies and deduced the following conclusions that may also help you.
Clearly define expectations
For all participants define the process of comparing the requested resources against the expected results. Meet and discuss all proposals.
Create case studies
This is an alternative to the above. Each department creates an argument that begins with the market situation (demand development) and covers costs and additional necessary resources. It’s about defining “What” or “How many” clearly as well as the answer to “Why.” This will map the realistic assumptions for the development of the company as well as of its profits. Without these analyses there is no sense in discussing plans and budgets.
The role of the company’s individual parts in the entire portfolio
One method is using the classic portfolio matrix, where we see the growth potential on the horizontal axis and the economic impact (profitability, benefit for the company) on the vertical axis. All of the company’s divisions should have the data necessary to identify their position.
As soon as their positions are clear, their role is determined, along with the objective if it is desirable for them to move somewhere on the matrix. This is then the basis for the future budget discussions.
Resource allocation should be vertical
Too often companies divide up resources horizontally, i.e., equally among all parts of the company. The right approach is informing everyone that the allocations will be vertical, regardless of last year’s budgets. This means that those parts of the company that do the best will also be supported the most. And then it goes in order. The divisions that are not prospering get whatever is left, if anything.
After the reallocation process is completed, everyone must know where the money went and why. This gives them the opportunity to understand the decision. They find out what is expected of them and how in the future they can influence how much of the resources their part of the company will get.
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