Budgeting makes perfect sense in theory. In practice, a budget rarely works.
Costs shouldn't be attacked directly
The typical approach of budget cuts and layoffs usually don't result in sustained changes to cost structure.
Instead, companies must make fundamental changes to the way they work. If they remove waste, errors, and time from their processes, they will get cost efficiency as a byproduct.
They don't work
Defining budgets is time consuming, and managing them adds a large overhead.
In the end, they are very unlikely to work. Instead these are the common outcomes:
- spending more to keep within the expected costs;
- spending less than necessary just to keep below the budget;
- having to go over the budget, resulting in feelings of deprivation and guilt.
Budgets are unsubstantiated and uninformed
If you're doing something new, there is no way to estimate its cost.
When you budget for something you haven't done in the past, you're most likely making up a number in your mind, with absolutely no rationale behind it and failing to reach it.
Budgets put everything in the same bag
Budgets are typically defined for a large number of initiatives. For example for a whole department.
By defining a department budget, there's no guarantee that the ideas have been thought trough. There will be good and bad ideas / investments and they'll all be grouped into a single budget, without much thought.
Also budgets tend to live in a long time period: quarter or even yearly. We know that doesn't work.
Focus on efficiency and effectiveness not costs
Costs are a consequence of efficiency.
Focus on highly efficient processes and initiatives and your costs will go down.
There's a better way
This is a better way to do it.
- 1) Define the objective.
- 2) Explore different ways of getting there as initiatives;
- 3) List the expected costs and results for each initiative;
- 4) List the dependencies for those initiatives;
- 5) Through expected ROI and dependencies, find the best way to apply the money.
This forces you to think about what you want to do and to focus only on what has the highest return, no wasteful spending of valuable resources (time and money).
Let's say our objective is to do body recomposition: lose fat and gain muscle.
Let's start by defining the objective:
Objective: "Reach 12% body fat".
Now let's define the initiatives:
|Initiative||Expected Cost||Expected result BF%|
|Stop eating fried food||0€||-1% BF|
|Joing cheap gym for 3 months||90€ (3 months)||-5 %BF|
|Joing expensive gym for 3 months||270€||-5% BF|
Prioritize the initiatives
If we chose to stop eating fried food, doing intermittent fasting and joining a cheap gym, it will cost us 90€ and we're expected to lose 8% body fat.
Liposuction could give us a better result: 10%, but that would cost 11 times more.
Track each initiative individually
Now instead of defining a budget, we have each initiative which we can manage and track individually.
That means we can start by joining a cheap gym. If that doesn't work, we can stop this specific initiative, learn from the experience and find a better alternative for it.
This way you select only the best cost to result ratio initiatives. It will give you focus and more efficient results.
Simple and effective.