Every year, budgets creep up by 5 per cent here and 10 per cent there. Yes, it’s a fact that we will spend more on utilities next year and, yes, we desperately need another salesman and more manpower to handle the workload. It’s only one more person and it’s only a small increase in overheads ... but it’s necessary.
In many organisations that is how budgets are set. We take last year’s full year figures, add a few percentages for inflation and cost increases, apply the same logical growth to revenue to cover the increased overheads which is an easy “fix”. And there we go — the annual budget is done.
The problem with this approach is that it isn’t based on reality and indeed it’s the start of a very slippery slope whereby the compound effect of all these cost increases and small reductions in efficiency quickly add up. Margins are eroded and capital and investments tied in less efficient parts of the business, which then prevents the business from reacting and investing in the areas of the biggest growth.
This has been a case with most companies of our industry. But how does this happen. It’s the gradual tendency of any organisation, and those within it, to hit autopilot, to ease off the accelerator and without conscious thought it becomes the natural pace. This is why it is possible to achieve more some days in two hours than in 10 hours — because the default is to self-pace ourselves to fit the work day into the available time.
It is human to have natural scope creep, which is an equally insidious fact of life. Over time we take on more and more tasks but rarely drop tasks. We add more processes, checklists, quality controls but never think to stop, wipe the slate clean and start again with the bare minimum that is relevant for the business today like a start-up would.
To manage this, it is recommended to use “zero-based budgeting”, where we constantly re-evaluate our resources, to question whether they are being deployed in the right areas and to force us to redeploy them constantly. This makes us take an active and conscious effort in reallocation of resources and prevents the insidious cost creep and the constant loss of efficiency that plague organisations.
In its basic form, we should apply it in three stages:
* Improvements, which are investments in equipment, machinery, processes or systems that free up resources, not add them.
* Growth, which is then obtained by using these freed up resources in the areas with the highest potential return on investment.
* Risk, which defines how we as a company go about ensuring that the downsides are managed, the upsides are properly planned, and don’t result in shortages that hamstring the business.
Managing insidious creeps will certainly add value and add a fresh lease of life to the organisation.
Lachlan Jackson is with Ecocoast and is also a member of Entrepreneurs’ Organisation.