Budget, budget, another budget and two more budgets in the morning…

Let’s talk about losses. Please, without fanaticism, because each company has own EF. Efficiency factor, if you remember school physics. And this factor is never 100%. But when it’s 10% only like steam engine, probably it’s pity. Especially to the business owner.

But it's worth starting with numbers. More precisely about illusion behind. Most companies have financiers at the helm. That’s why budgeting is raised to the rank of “Golden Calf” and all organization is forced to warship him. For people, who worked with numbers, numbers are an indicator of events, a symbol of reliability, and a source of confidence. But there is one, or maybe even more “but”. Figures are a model of reality. The veracity of which is never ideal and depends on the chosen methodology.

Therefore, it surprises me when companies try to budget everything. The most sophisticated method I've seen was 10-day planning. And when in difficult times in a week they manage to carry out 5-7 iterations of the annual budget in manual mode, be sure - no answer to the question "what to do?", nor even an understanding of "where are we?" exists.

Nevertheless, let’s take an example. Of course, from logistics. Here we held a tender for transportation. There are tariffs, and in some proportion cargo is moving. Here is the budget, and it is being performed. Then changes have taken place in the transport market and return cargo has appeared. The tariff could be reduced, isn’t it? The question - will the carrier that won the tender tell you about it? I have doubt. He fought for a long time for participation, dumped prices, squeezed in possibilities, “tightened his belt” and finally he has the opportunity to "win back". Maybe your transport manager will tell you about it? He's not crazy. He knows the corporate rules of the budget game. As soon as he lowers the tariff in the system, this will become his new KPI. A parameter for the performance of which he will pay with his bonus. And if prices go up. There are at least two ways for a manager. Agreeing to carry badly, a longer lead time, not in full. Needless to say about all risks and possible losses. Or inform about terrible cataclysms and tell the management about insurmountable obstacles. Hoping that the bonus will remain. But experienced managers overbudget a “safety reserve”, or skillfully push the cost overruns as additional services. By the way, the “safety reserve” must be spent in a timely manner so that there are no questions. But we will talk about it next time.