The title of this article is a portion of a quote from Malcolm Gladwell; the full quote is:

“If everyone has to think outside the box, maybe it is the box that needs fixing.”

For FP&A professionals the box is budgets.

Thinking outside the Box

Google the phrase “thinking outside the box” and the following definition appears:

“Thinking outside the box is a metaphor that means to think differently, unconventionally, or from a new perspective; this phrase often refers to novel or creative thinking.”

In the foreword of the book Swing Your Sword by Mike Leach and Bruce Feldman Michael Lewis wrote the following about finance:

“In the financial markets there is always and everywhere a desire to be seen as a little different from the next guy.  Professional investors love to present themselves as ‘contrarians,’ people who think originally about the world.  No one ever says ‘invest your money with me because I’m an ordinary guy who knows how to follow the herd.’”

How can we connect these quotes to budgets?

Let’s begin with the Michael Lewis quote.

FP&A professionals, like other professionals, work in a competitive environment.  The level of competition can be so high FP&A professionals may present themselves as contrarians.  A way of presenting oneself as an FP&A contrarian is to think unconventionally about budgets.  This may not be difficult to accomplish because budgets have been an FP&A fixture for decades.  As a result an FP&A professional can be tempted to strengthen their position by presenting an unconventional viewpoint on the norm.

Let’s end with the definition of thinking outside the box.

Novel thinking is about arousing interest.  Interest can be aroused because the norm may appear boring, unnecessary, and/or useless.  These emotions can create a desire for change.  Change may be so needed that people will look for novel thinking.  This type of thinking may be seen as solutions to the problems that exist in budgets.

Note the previous sentence…problems that exist in budgets.  I admit problems exist in budgets and work on ways to solve these problems.  My approach to solving these problems is centered on the following Kern Rule:

DO NOT COMPLICATE SIMPLE

Complicating simple is about the process.  The process is to make budgets better, the process is not to look unconventional.  Unemployment, whether one is self-employed or works in private industry, is a concern however do not let the concern overwhelm effort.  Effort should be directed at solving problems and one problem that needs to be solved is budgets.  FP&A professionals can solve this problem not by thinking outside the box but by seeing budgets as the box.

Fixing the Box

Establish a Value Proposition

A value proposition has a two-fold purpose.  One purpose is to improve the well-being of a company’s stakeholders and the other purpose is to stand out from competitors.  Failing to achieve this two-fold purpose is failing to exist as a business.

A manufacturing company has established a value proposition of “same day, next day,” i.e. the company will deliver products the day of or day after the order was received.  It has been determined that this value proposition will improve the well-being of the company’s stakeholders and help the company stand out from its competitors.  The company’s priority is to fulfill this proposition.

A company’s budget therefore should be organized around the company’s value proposition, e.g. the manufacturing company’s budget should be organized around how to fulfill “same day, next day.”

Organize around the Value Proposition

I define financial planning as the process of thinking about how to accumulate wealth.  This definition “fits like a glove” when it comes to this step.  The wealth of a company is anchored by a value proposition but just having a value proposition is not enough, a company must execute on its value proposition in order to achieve its two-fold purpose.  The connection from financial planning to a budget is critical to improve the chances of fulfilling a value proposition.  Thinking about what is required to fulfill a value proposition and organizing the thoughts into reference material, i.e. a budget, can simplify the execution of a value proposition.

Think broadly vs narrowly

One of the more time consuming tasks I had in private industry was preparing budgets for the departments I managed.  It was time consuming due to the details I had to provide.  One detail I had to provide was supplies expense per month. First, what I provided was at best a guess and second, the guess may be useless for evaluating performance.  This experience is why I advocate broad thinking for budgets.

Thinking broadly comprises scope.  Companies are organized by functions like production, selling, and administration. Budgets should not emphasize how much money is needed by one department for using office supplies, budgets should emphasize how much money is needed by one function for fulfilling value propositions.

Thinking broadly comprises time.  Requiring amounts by month puts an emphasis on monthly activities.  Due to a variety of reasons events can negatively affect monthly activities.  Extend time from monthly to annual amounts so monthly activities are not improperly scrutinized.  What needs to be properly scrutinized is whether value propositions are being fulfilled.

Include Non-Financial Numbers

Budgets that comprise financial numbers like net income and net cash flows limit the scope of fulfilling value propositions. Non-financial numbers like time and volume are elements that help people determine the ability of companies to fulfill value propositions.  The inclusion of non-financial numbers is an excellent way of fixing budgets, the box, which I addressed in an article I contributed to FP&A Trends:

Balance Your Financial Planning

Conclusion

One of my personality traits that people acknowledge and compliment is passion.  My hope is passion can be seen in this article.  This article does not represent the end but the beginning of a presentation.  The presentation will expand on the elements for fixing the box, budgets.  The expansion will be centered by Kern Rule #2:

NOTHING CAN BE PERFECT BUT EVERYTHING CAN BE BETTER.