To achieve this, you need to make the numbers available to everyone, easy to use and easy to understand. A well-designed view on the numbers in the core financial systems empowers managers to take control of the numbers they’re responsible for. Dozens of spreadsheets floating around in the organisation, on the other hand, obscure the real picture and keep everyone confused.
So far, so obvious. But when it comes to sales and revenue budgeting as opposed to expense budgeting, many people lose their nerve. “We can’t let the sales team set their own budgets!” they say. “They’ll just set themselves nice low targets so they can make their bonuses.”
There are three big problems with this response. First, if you don’t trust your sales team even to draw up their own forecasts, why are they working for you? They are your single most important link with your customers, the people your business is all about. If they’re trustworthy enough to talk to clients on your behalf, they’re surely trustworthy enough to have a say in the budget.
Market information in your hand
The second big problem is that, if you draw up revenue budgets without reference to your sales team, you’re ignoring your best source of market information. An accountant sitting at head office can’t possibly have the same knowledge of what’s happening out there as the sales team, who see it every day.
Let’s take as an example a year when the national power supply is disrupted – you’ll remember a couple of those – and people resort to diesel-powered generators and gas heating. You can bet diesel and gas sales will do very well in a year like that. If you looked only at the numbers, you might well decide that since the sales team did so well last year, you’ll set them a stretch target of that +10% this year.
In that case, you’d be riding for a nasty fall. Sitting in head office, you don’t spot the special circumstances and contingencies that shape sales performance from year to year.
Budgets vs targets
The final big problem is this: It’s dangerous to confuse a budget and a target. A target is what you hope to achieve by putting in serious effort. A budget is what you think you realistically can count on. If your sales are funding your operations, you want to base your expense budgets on a realistic expectation, not a best-case scenario.
Once you get that straight, it’s clear that you can make targets as ambitious as you like – while still getting realistic budgets. And there is, of course, no reason you have to accept anyone’s budget proposal at face value. By all means make your sales team motivate for their budget, and challenge them if necessary. Just don’t make the mistake of setting unrealistic targets – or you might find yourself without a sales team altogether.