The title of my LinkedIn profile is “Finance Influencer.” My LinkedIn profile summary contains the titles of accountant, lecturer, and writer. One could conclude that I do not need another title however a situation has arisen in which another title is necessary. The situation is the criticism of budgets. The criticism has presented an opportunity to assume the title of defender and as a defender I would like to defend budgets.

Opening Statement

What is a budget? Google the phrase “definition of budget” and the following definitions appear on the first page:

• An estimate of income and expenditure for a set period of time.
• An estimation of revenue and expenses over a specified future period of time.
• An estimate of costs, revenues, and resources over a specified period.

These definitions are good however I prefer a better definition which is

USE OF NUMBERS TO EXPRESS THOUGHTS

Numbers

The three definitions of budgets emphasize financial numbers. Income, expenditures, revenues, expenses, and costs are financial numbers however they do not sufficiently express thoughts. In order to sufficiently express thoughts non-financial numbers must be included.

Non-financial numbers can be measurements like

• Profit margin
• Asset turnover
• Financial leverage

Non-financial numbers also can be measurements like

• The number of suggestions provided by employees
• The amount of time to fulfill a customer order
• The percentage of customer retention

The exclusion of non-financial numbers is a reason for the criticism of budgets. Non-financial numbers provide insights into the creation, promotion, and distribution of what companies sell. The tasks of creating, promoting, and distributing what companies sell are critical to financial health. If financial health is not established, the existence of companies will be hindered. The hindrance to financial health should not be caused by the exclusion of non-financial numbers.

Numbers are an integral part of our personal lives. We use cash balances for measuring financial health, we use interest rates for financing purchases, and we use time for organizing activities. The use of these numbers corresponds to our thoughts and thoughts are not exclusive to our personal lives. As professionals, we must use thoughts to guide actions. The connections from numbers to thoughts and vice versa represent a defense of budgets.    

Thoughts

I begin this section with one of The Kern Rules:

ONE CAN THINK WITHOUT PLANNING BUT ONE CANNOT PLAN WITHOUT THINKING

A budget is seen as a product of financial planning however a budget is more than that. A budget is an expression of thoughts. Thoughts are prevalent in companies. Production functions think about how they will create what companies sell. Selling functions think about how they will promote and distribute what companies sell. Administrative functions think about how they will support what companies sell. How companies can organize these thoughts is through budgets.

Budgets provide an opportunity for production functions to think about how they will create what companies sell through the combination of direct materials, direct labor, and manufacturing overhead. Budgets provide an opportunity for selling functions to think about how they will promote what companies sell through the combination of content and media. Budgets provide an opportunity for administrative functions to think about how they will support what companies sell through the combination of people, process, and technology. The elements that comprise the thinking of each function must be organized because disorganization breeds unnecessary mistakes. Unnecessary mistakes can affect financial health in ways that hinder the existence of companies. Do you want unnecessary mistakes to hinder the existence of the companies that employ you? If your answer is no, perhaps you should give budgets more attention.

The expression of thoughts is the foundation of financial health. Thoughts lead to action and action determines financial health. The connection from thoughts to action to financial health establishes the importance of budgets. Budgets are important because they organize the effort to create financial health. Organizing the effort to create financial health represents a defense of budgets.

Criticisms

There are two criticisms of budgets: budgets are inflexible and irrelevant. As a defender of budgets I cannot ignore these criticisms. The reason for these criticisms are not in budgets themselves but in the process of creating budgets.  Budgets should be created in ways that make them flexible and relevant. How can budgets be created in ways that make them flexible and relevant?

The answers to this question are in this video:

Innovation Is Actually Easy

Budgets should not be benchmarks!

Budgets should provide guidance on how to create, promote, distribute, and support what companies sell. Guidance on how to accomplish these tasks, as described in this video, is not based on what to do in the future from what competitors did in the past. First, what existed in the past may not exist in the future. Second, your competitors are not you. The second point needs to be incorporated into the use of numbers for expressing thoughts.

Expressing thoughts are centered on answers to two questions:

1. What are the reasons that customers have for buying what we sell?
2. How do we satisfy these reasons?

Budgets should answer these questions!

Closing Argument

Companies have mission statements to guide their actions. Budgets should serve as mission statements but with numbers. Numbers should guide companies to improve the well-being of their stakeholders. Numbers also should establish criteria for creating, promoting, distributing and supporting the characteristics that improve stakeholder well-being. Using numbers to express thoughts is the foundation of budgets. This foundation is the reason for my defense of budgets. 

Conclusion

There is an old saying…do not throw out the baby with the bath water. Budgets have weaknesses however budgets themselves should not be thrown out. The definition of budgets, using numbers to express thoughts, is a viable definition for companies to improve the well-being of their stakeholders. Relying on this definition should not eliminate the recognition for improvement. Improvement in areas like flexibility, simplicity, and timeliness must accompany what budgets purport.

Remember another one of The Kern Rules:

NOTHING CAN BE PERFECT BUT EVERYTHING CAN BE BETTER