Last week, we checked if our budget has been irrelevant this year. This week, we will discuss if budgets are a suitable mechanism for performance evaluation.
Budgets and Performance Evaluation
In the traditional budgeting model, a budget tries to predict the destination and the path to get there. It tries to predict what obstacles will appear and what resources will be needed to overcome them. With this model, good performance equals meeting the budget, but as we have seen over the last couple of weeks, a budget is a poor predictor of the future.
So, when you try to evaluate your business performance with your budget, you are left with the questions. Is this analysis telling me my business is doing well, or does it give me a false sense of security by telling me I’m on the right path when that path may no longer be the best?
For example, if you are planning a cross-country road trip, a traditional budget would be like deciding three months beforehand the exact turns and roads to get you to your destination. You would then evaluate your performance not by reaching the destination but by whether or not you followed that exact path. You would adjust course to get back on the path instead of ensuring you are still headed to the destination because the path under traditional budgeting is just as critical as the destination.
This example shows the issues with using a budget to evaluate performance. The path that brings you to your destination isn’t as important as reaching the destination. If you are trying to reach Las Vegas from Virginia Beach, you are going to use a GPS to navigate the best way to get there based on the shortest route and considering road closures and construction. This way, as events change in real-time, you can adjust accordingly.
The same applies to business, by setting SMART Goals (SMART stands for Specific, Measurable, Achievable, Relevant, and Time-Bound) for your business (the destination). You can then develop a way to track your performance to those goals so that you can adjust your business’ direction in real-time. Reporting tools like dashboards and scorecards are updated automatically so that any employee at any level of the organization can see where the business is headed and adjust their department or part of the organization as needed.
This removes the need to manage employees and shifts the focus to leading employees. Instead of instructing the employee on how to perform their job functions, you are giving them a tangible way to see where they are and where they need to be, empowering them to proactively make changes to direct the part of the business they control.
Conclusion
In conclusion, plans and budgets should be used as guides for decision-making, but they should not be the sole yardstick for evaluating performance. What truly matters is reaching the destination, and the evaluation should be based on whether or not that goal has been achieved. The path to get there should be flexible and easily adaptable, reflecting the ever-changing nature of the business landscape.