A sage once said, “the most common miscommunication is the illusion that it occurred.” Often we have not communicated as clearly as we think we have.

One fertile ground for miscommunication is the annual budget creation process. Budget setting can easily deteriorate into gamesmanship. One one hand, the field office sets an artificially high number knowing that it will be cut, and on the other, headquarters starts with an artificially low number knowing it will rise.

Much of this occurs because budgets are asked to fulfill many, often conflicting, roles:

– Forecasting: Budgets are a financial plan designed to predict many variables including production or sales or revenue levels, expenses or cash investment needs, and expected cash flow proceeds.

– Control: Often organizations operate on a “management by exception” basis, were budgets are kinds of tripwires to call management’s attention to variations from expected or predicted or historical norms.

– Aspiration: At times budgets are asked to be “stretch goals,” a form of raising the bar another level higher to spur effort.

Jack Welch touched on the pitfalls of the budgeting process in his book “Straight from the Gut.” I am indebted to him for much of what follows:

I tell my team members that I have three requirements for them in the financial plan:
1. Beat the competition (this should be the easiest).
2. Beat last year (difficulty varies according to economic circumstances).
3. Leave nothing major on the table.

The last–to leave no significant upside uncollected–is the most challenging. It requires the ability to adapt to changing circumstances, to have an in-depth understanding of the nuances and subtleties of the marketplace.

I tell my managers and my direct reports that I expect them to be able to look me in the eye at the end of each quarter, at the end of each operational cycle, and tell me they left nothing on the table. No excuses.

In many ways this may be a subjective standard and its effective deployment depends to a large degree on having a strong culture of excellence, integrity, and mutual respect. When those exist, it can be remarkably effective.

This is a classic from the NSC Blog archive. Originally posted December 3, 2007.