The truths about budgets, part 2

Last Thursday, I listed these three truths about budgets:

Budgets aren't real money.
Any discretionary budget you do have should be managed primarily by your team, not by you alone.
No one ever got a promotion or a higher performance evaluation because of their excellence in budget control.

Let's consider Truth #2 next.

Truth #2: Any discretionary budget you do have should be managed primarily by your team, not by you alone

Just as a budget serves as a proxy for the plan your organization has for your team, your handling of your budget is a proxy for how you view trust and autonomy on your team.

If you hold your budget tight, give people zero latitude on making spending decisions, and criticize how people manage their own budget responsibilities, your team will act passively, refuse to take risks, and become disengaged in their daily work.

If you share budget information and decision-making with your team, you will build trust, raise autonomy, and build decision-making capabilities in your team.

Remember, most of your budget is already pre-determined unless you are at the most senior levels of the organization. It's not a risk to allow your team to manage the budget dollars that you do have control over. And the benefits are powerful. It's an easy decision, once you get past the idea that you have to be the single control point for your team.

How can you make a difference? Here are some great action items:

Share budget details with the people on your team. It shouldn't be a secret what your team's budget details actually are. In the best organizations, team members know how much is being spent, and who is spending it. You don't need 46 pages of travel expense rules if everyone can see how much is being spent by everyone on travel.
Don't waste time doing internal budget transfers for small amounts with your peers. Your budget is all part of your manager's (much larger) budget. If you go over your budget by $500 and your peer goes under by $500, your manager won't care. And if s/he does, you should be looking for a different place to work.
Don't micromanage budget categories. It doesn't matter one bit to the organization whether a person spends $500 on a conference fee or $500 on books. Either way, it is $500 of green-dollar spending. My most enlightened leader gave me my whole discretionary amount and let me spend it however made the most sense.

(I happened to spend my discretionary money mostly on books and talking with people who were exploring the same new technologies. Conferences were rare because the whole area I was working in was all so new. Would it have made sense to say, "You can only spend money for travel and conference fees because someone somewhere put money in the travel or conference fee sub-code?" Of course not.)

Become good friends with your financial team. The actual budget you have is just some general information about a plan made months ago. The financial team has the real work on planning, tracking, monitoring, and implementing actual spending. Making payroll is a real issue. Making a department sub-code target set last October is not. Real financial work is important to the organization's success, no doubt. You can help your finance team, and they can help you.

Which brings me to the exception to the truths I set up earlier.

The exception

For some managers, your budget may include the control of a large financial item. If so, the results of your team's work has a direct impact on the organization's financial results. Examples include:

Customer concessions for the customer service team
Sales revenue
Capital spending
Making payroll

What's absolutely critical here is that these financial targets aren't the same as budget targets.

The test of a financial measurement versus a budget metric is simple, but important:

If you exceed the target, can you spend the money you save? If so, that is just a budget issue. If not, you have an organizational financial measurement.

So, if you are the manager for a team of insurance adjustors, you'll have a budget for your team's salaries, for their travel, and for the costs of printing forms and materials that the adjustors need, along with a few other items. You also probably have a dollar-denominated target for how much you pay out in insurance settlements. That target will be a large number, perhaps bigger than your entire budget.

If you have a month where payouts are low, say, because the weather was unusually free of major weather events, you don't get to use the money you saved to take your whole team to a fancy resort in Tahiti for a month. Financially, the company is better off. Your budget is unaffected.

Similarly, if you have a month where payouts are high because of a hailstorm, you don't have to cut your team's salary by 50%. You simply are working in an area of the business where your target is measured in money. Financially, the company is worse off. Your budget is unaffected.

Financial targets don't make you better off or more important than other teams in your organization. Your impact may be more visible, but it is not more important. For the organization to function at the highest level, each team needs to function at a high level as well.

Breakdowns in non-financial management functions can be toxic for the organization, just like missing a major financial objective. Managing sales reps through fear and intimidation, falsifying safety inspections, or saving money by not spending on cleaning and security are just three of many examples.

Which brings us back to Truth #2: Teams, not just the manager, should manage budgets.

So here is the challenge if you want to be a leader and not just a manager--

If your team can best help you with your budget if they have full information, if they build their own decision-making skills and don't have to ask you for every dollar ...

...Why would you not operate the same with them and your key financial targets?

Great leaders spend their time building a great team. They spend time with their team to support day-to-day operations. They lead experiments to test ideas for improvements. They build great places to work. They coach their people by asking great questions instead of giving commands in the form of advice. They serve their teams by helping team members build skills and autonomy.

Whether your team's goals are measured in dollars and cents, or in anything else, your work as a leader should not be stuck in the minutiae of budget details. Your real impact is measured on the great work that your team accomplishes for the organization.

On Thursday, we'll examine the links between budgets, great work, and career success. Thanks for reading –