New year = New budget. I’ve done nearly 20 consecutive annual planning cycles for large businesses. Here are 7 principles behind a great budget:

1. It’s not a finance party A finance only budget is a waste of time. Finance lead the process, but the business (led by the CEO) must own the inputs and outputs Finance should own the ‘sausage machine’ but there must be a business owner for every ingredient (and the sausage!)

2. Tell a Story A good budget can be summarized in a few paragraphs. The CEO & CFO can use the story throughout the year, to drill home to the business what must be done. There is a lot of complexity in the detail, but at a top level, there is a simple story to be told.

3. Budget to FCF A budget shouldn’t finish at the Income Statement. If you want the support of the business to land the free cash flow target. You need to build it into the operating plan. It’s particularly important for working capital management. The simpler the better.

4. Zero Base Expenses I start every expense budget process with the same line: “This year we are going to spend nothing. $0. Now tell me what do we need.” It’s fashionable to call this Zero Based Budgeting (ZBB). To me, its just budgeting. Good budget hygiene.

5. Link to performance management Remember I said the business needed to own the inputs? Well those inputs become the measurables for those individuals. It should drive their performance management, and reward. Want that OM to drive pick rate harder? Then bonus them on it.

6. The ‘wrap around’ It’s easy to get a disconnect between your old year exit run rate and new year budget run rate. Often created by the time lapse between assumptions being set & the year end. Make sure there are no regrets / own goals here. If there are, that’s on finance.

7. Link to FP&A Cycle Bad budgets sit in a PowerPoint pack in a drawer and go stale. Good budgets are the anchor for a great FP&A cycle. I talk about this in more detail in my thread on the ‘Sacred 5’ planning and reporting processes

That’s my quick guide to budgets! If you want to go deeper, I launch a newsletter this Friday. Sign up here ⬇️

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