Calendars and budgets: Tools or poison?
“For the farmer the calendar year is indeed much more than a convenient measurement; his production cycle actually runs from harvest to harvest. But to apply the farmer’s unit of economic life to an industrial economy, except as a conventional measurement, cannot be justified; yet we let the calendar year determine our economic thinking about our economic policy.”
—Peter Drucker, “Concept of the Corporation”
Like darn near everything Drucker wrote in his long life, this quote still applies — even though he wrote it in 1946! If you substitute “business” for “economic policy” at the end of the last sentence above, Drucker clearly articulates two problems I see in several businesses.
Mature businesses with predictable revenue and profit can often budget in an extremely detailed way tied tightly to the calendar. However, young businesses or new lines of business within a mature business often cannot. And to look for tight predictability in this situation often leads to tremendously poor decisions. You can’t expect infants to run a marathon. They have to get through the running-into-furniture stage first!
Many new products and services fail or don’t meet expectations. Estimates are that between 40 percent and 80 percent fail. Some succeed after a slow start, and a few are winners right out of the gate. However, when a mature and predictable business launches a new product or service, I often see it apply mature business modeling not only in budgeting but also in too much overhead both in dollars and systems (for example, HR practices and meeting schedules). The company ends up inadvertently choking a good idea before it can succeed.
Likewise, investments in “growth” don’t always pay off in the year the investment occurs. Everyone knows this, but as budgets are built, I see quarterly and annual pressures eliminate rational thought. Without a long-term view, decisions required for lasting viability are about as popular as the federal government trying to deal with the issue of entitlement programs. Let the next guy do it!
Mature, stable businesses can be tough places to innovate and launch new products and services. The mindset of management is not even close to that of a venture capitalist and in most cases shouldn’t be. However, when trying to innovate new products or acquire an entrepreneurial firm, they’d be better served thinking less about bang-on budgeting and strict “calendarization” of revenue.
Budgets and calendars are two indispensible concepts in business, just like vegetables are good for you. However, you don’t feed 5 pounds of broccoli to a newborn!