Hey, happy Monday!
Welcome to the most useless, wasteful and expensive part of the year: that of the “next year’s budget”.
For some the process began last month, for others just in these days…
It is time to measure what has been and predict what will be.
The first part of the sentence is easy. So to speak.
You take the numbers, add them up, and write them down.
The second, the one where you have to make predictions, is unnecessarily tiring.
Not all of it, just some of it, especially that related to the turnover forecasts. This note discusses why and how you could make better use of that time.
Have you noticed that exactly around this time, the frequency with which the word budget appears in our emails is getting higher and higher? Some recurring patterns:
- We have to consume the budget
- There is no more budget
- We are making the budget
- We move it to next year’s budget
- Let’s talk about it in January!
Have I forgotten something? Click Answer and let me know.
Good work! And remember.
Always Make Progress!
● PROFITS / Impossible predictions.
The two sides of the budget
There is no problem with budgets, except when they are used as a strategic tool.
These budgets look a lot like a small budget. They can refer to the entire company or to individual teams, squads, or business units, which are organized as if they were small companies within companies.
In any case, it is always divided into two. On the one hand you have the costs. On the other, turnover.
Costs have as many as two advantages:
➀ are the only certain thing;
➁ depend solely on your decisions.
If you don’t change the way you work, deciding to do exactly the things you did the previous year, they are easy to predict. ⌘C+⌘V.
Turnover, on the other hand, has one major disadvantage: it is out of the control of decision makers.
Even if you have decided to do exactly the same things, it is impossible to predict. It becomes a commitment, an agreement between gentlemen, a pact with the highest level of the hierarchy. You take the previous year’s number, add that “a little bit more” and it is written in the table.
Let’s take an example. Last year we told the world we would generate $5.4 Billion in revenue. Pandemic scales back, behaviors change, and in November we have to admit that at best we will end the year between $4.4 and $4.8 Billion. Who took my $1 B?
This is what happened to Peloton (more in the Insights), the Netflix of sports-at-home, perhaps one of the few companies in the world with margins comparable to Apple. Now that people are going back to the gym and spending more time outside the home it has simply reduced demand ¯\_(ツ)_/¯
When these things happen CEOs copy and paste this response: “We will be taking concrete steps to reexamine our expense base and adjust our operating costs to better align our investments with our revised growth expectations.”
Peloton’s shares lost more than 30 percent in a single stock market session.
I don’t know anyone who works in Peloton and frankly I don’t think they are clueless, in fact I think they are among the brightest teams to watch especially right now. The episode, however, simply confirms that revenues are out of anyone’s control.
● PROFITS / Materialize the numbers.
What if we focus only on what can be controlled?
That is, on how the teams decided to make this number materialize. That is, on strategy.
If costs are certain then some of the turnover must also have a good confidence threshold.
In December, no one presses a button that says “RESET,” and the billing meter starts over again. Some projects will continue into the new year and others will begin, so it is already possible to write down some (fairly) certain numbers.
This is planning, not forecasting.
Another important part of the revenue comes precisely from the business model that allows for recurring revenue, and here please do not confuse installment payments from a subscription!
Having a recurring revenue stream, allows you to focus on your product rather than simply selling projects because while you are acquiring customers, it is important that those who pay don’t stop paying!
Subscriptions are not a solution to everything even though subscription businesses are worth more.
What I want to provoke you about is to stop imagining turnover and invest that time in 4 key actions:
➀ identify metrics that are the result of actions over which you have control (e.g., the number of bids made, their total value, and their average value are good indicators of potential revenue)
➁ extract these metrics, month by month or better yet week by week and identify the bottlenecks and describe what caused them
➂ for each bottleneck identify 3 possible solutions to be implemented to solve it
➃ do not provide extra costs, instead use those of the activities in Step 2.
In this new way of working you could tie incentives to execution and not to outcome (which is a product of execution).
Let’s be realistic! It is difficult to make revolution in a day, easier instead to make an experiment.
Still complete the budget you need to do but spend very little time on forecasting and much more on strategy.
Immediately lock in the calendar of frequent check-points, like in a video game, unlock new resources if you pass by the checkpoint with the right numbers.
If things work out, it will not be a problem to increase investment.
Conversely, you can change your strategy while there is still time to do so.
The problem with budgets is that they are films shot from a single perspective, that of the company, but the lead actor is always the customer! Put him back in the center of the action.
● Insights
🚵♀️ Peloton is having a hard time. CNN Business video commentary
🏠 The first time I mentioned Peloton and the The “bring-at-home” wave. №9
🌟 Here, however, we talk about their North Star Metric №52
🎯 How to bring together sales objectives and OKRs? №86
🥕 From TED by Daniel Pink to the literature on the subject, it is clear that economic incentives do not increase financial performance, on the contrary, they may even be dangerous (HBR).
