It is almost an axiom that when we prepare for something, when the time comes to implement it we will do it better, more efficiently and certainly with less effort and stress. The most fanatics will tell us that a project begins at the beginning of its planning.
William Deming (1900-1993) was perhaps the first person to explain in a structured way the reasons, benefits, and process of planning. An American engineer and statistician, he was a professor, author, speaker, and management consultant.
The theory that made him famous was the Deming cycle,
PDCA, (plan-do-check-act).
Based on this theory, the planning of an organization’s actions is a perpetual cyclical process, which learns from its past, redesigns its future, resulting in continuous improvement in implementation.
The explanation of the cycle
(plan) – The first stage is the planning of actions, both in terms of time and cost.
(Do) – Το δεύτερο στάδιο είναι η υλοποίηση των σχεδιασθέντων ενεργειών.
(Check) – The third stage is the evaluation of the results and the justification of deviations.
(Act) – The fourth stage is the redesign of actions based on observations or new data.
If we think about it a little, this cycle of actions applies to our everyday lives and happens spontaneously in our minds, from the simplest things we do to the most complex.
There is no time limit for the repeatability of the cycle of actions, but depending on the stability or otherwise of the environment, actions are determined at appropriate time intervals, which are determined by the need for review.
Although this theory was formulated several years ago, and initially applied to the American war industry before World War II, it continues to be more relevant and useful than ever.
The annual budget of an organization could well be a simplified application of Deming’s theory or even a faithful one. The budget process cycle is usually annual, and obviously improves each year by utilizing past knowledge and experience, and especially the justifications for deviations, but also new data.
Deviations from reality can be positive or negative, but their justifications are what improve not only the process but also the outcome.
And it is an unwritten law of the nature of things, and it is almost always true, that
– if we do not justify positive deviations, they will not be repeated in the future, and
– if we do not justify the negative ones, they will be repeated, sooner or later with mathematical precision.
And when the data changes so much in our lives, the existence of planning and redesigning of actions becomes all the more necessary. It is this process that promotes the adaptation of organizations to new data, and it is this adaptability that ensures sustainability and success in entrepreneurship.
The annual budget is synonymous with sound entrepreneurship, and the benefits for an organization can be multiple. This applies not only to the results and information of the budget, but also to the process needed to complete it.
The benefits are many, but I will focus on three main ones: information, the process, and the culture of preparation.
1. Information
The first, immediate and most obvious advantage is the information that those involved receive from the forecasts of the financial results of a budget.
A properly structured budget model gives us a lot of information regarding the financial results, balance sheets, cash flows and financial indicators resulting from a financial year, not only for the entire organization, but also for individual departments and categories.
In addition, by using technology and testing multiple scenarios and policies, we understand the gravities and sensitivities that characterize a business activity as a whole and in parts.
At the same time, we also have the evaluation of activities in terms of their efficiency and their contribution to the final result. In short, we know where we win and where we lose, because both always happen, without this necessarily being a mistake.
The results are a function of the assumptions and hypotheses we make, and can be positive or negative. What matters is that we know it a year in advance. That is, we have time to react if we want to correct something and act proactively.
Someone, whose name I don’t remember, said that problems are like elephants. The further away they are, the smaller they seem and the more options we have to avoid them. And how right he was.
“You know that if the Titanic had seen the iceberg 1.5 miles earlier, it would have avoided it.”
2. The process
The quality of a budget is proportional to the quality of the data we will use.
To produce an annual action plan or budget, everything is put on the table. It is what we say in plain Greek, “we make a budget”.
That is, we review everything that happened in the past in order to be as realistic as possible in our predictions for the future. Therefore, all the collaborations we have, whether they concern customers or suppliers, must be put under the microscope and evaluated. In addition, all the services and products we offer to the market are also evaluated.
In this process, non-productive costs are always revealed and sometimes excluded, as well as hidden incomes, which are activated under certain conditions. Negotiations are encouraged even on necessary expenses, as well as research into additional distribution channels.
“A well-known and well-known manufacturer of internal combustion engines, the simple engines it put on the market, initially placed them in a metal frame and painted them black for aesthetic reasons. At some point and after several years, it decided to put them in a package, again for aesthetic reasons. However, they continued to paint them, without this being necessary anymore.
Two years and several million later, after a redesign process, they realized the failure of the production process, namely the unnecessary painting, and apparently discontinued it, avoiding unnecessary expenses of tens of millions of euros per year.”
If there were no process of inspection and redesign, they would still be selling painted engines in their packaging, unnecessarily spending exorbitant amounts of money.
The truth is that when we pay attention to something, it improves. Many times, on its own, without us even saying or doing anything, it is enough for this attention to become noticeable, a habit, and a consciousness.
3. Culture
“Planning” is neither a department of a company, nor a box on an organizational chart, nor a lifeless formal process. It is a habit, it is a way of thinking, it is a way of life, it is a culture.
For many, training and introducing an organization to this culture is perhaps the greatest advantage of implementing business planning.
The entire executive team that decides and influences the actions they are involved in is exposed to a review process that causes corrections, broadens the horizons of thinking (out of the box), proposes solutions and sometimes redefines areas of responsibility.
This entire process is obviously inextricably linked to the concept of evaluation.
Evaluation of an organization’s structures, its executives, the practices and policies they implement and finally, an evaluation of overall entrepreneurship.
With the business plans as a reference point and in comparison with what has been done, the evaluation of everything follows, which should result in rewarding the best and training the rest.
I would suggest to all, old and new entrepreneurs and business executives, to adopt the above logic and follow the above process. The obvious advantages of the information and the process will be seen immediately, as well as the effect on the culture of your organization a little later, when everything will have become a habit and a way of life.
