Dec 16 2019

Budgets – There Has To Be A Better Way

We are in the middle of the budget planning process at many companies. This is a recurring Q4 event that spills over into Q1. Budgets for the next year (2020) get finalized between December 2019 and February 2020.

As I was daydreaming the other day during a budget discussion, I thought to myself “there has to be a better way.”

Since I started investing in private companies 25 years ago, I’ve been experiencing the same cycle over and over again.

The normal situation is end of year budget planning. Q1 performance on plan. Q2 performance slightly different from plan. Q3 and Q4 performance divergent from plan.

Occasionally companies completely miss their Q1 plan. I’ve always viewed the Q1 plan as a competency test – if you can’t make your Q1 plan, something fundamental is wrong with the business. Of course, when you blow your Q1 budget, the plan goes out the window and gets redone.

Occasionally companies far exceed their budget in Q1 or Q2 or find themselves on a positive trendline that has nothing to do with the original budget. Or, the opposite.

The budgets also have huge variability after financings, when suddenly the budget gets recast given the new money in the bank, or the constraints against hiring are removed and costs increase suddenly, even if this is only to “catch up” with the budget that was underhired to.

It’s all lagging indicators anyway when looking at performance to budget. By the time the November financials are reported, we are already deep into December, and that assumes there is a robust discussion around the monthly company performance.

Some companies are excellent at managing this process. Most are not.

I know of a few very companies, including one very large one (Koch Industries), that famously run without budgets. I’ve tried lots of small incremental things over the years, such as 1H, 2H budgets (running on a six-month budgeting process) and having an expense only budget that lags revenue by a quarter, but I’ve never really landed on something that (a) works, (b) is materially easier, and that (c) management accepts.

When you add up all the time spent on budgeting across all the organizations on the planet (including government), the human species wastes an enormous amount of time on a thing we don’t do very well.

There must be a better way.