A traditional budget for expenses (compensation, travel, training) just begs for micro-management. "Hey, you don't need all that training!" In truth, top executives really don't know how much training you need to run your business. But what else have you given them to talk about?

Worse, it doesn't support sensible decision making. Budgets should be allocated based on the investment opportunities at hand; but there's no ROI on compensation, travel, and training. Thus, executives are forced to make budget decisions that are arbitrary, such as last year's budget plus/minus a few percent, or budgets based on current headcount rather than the needs of the business. This is no way to maximize strategic alignment or shareholder value.

Once approved, traditional budgets provide no basis for demand management. Clients may say, "You got all that money, so why can't you do everything I want for free!?" And you have no way to explain what is, and what's not, funded by your budget.

The right answer is a budget that describes the full cost of your products and services -- termed "Investment-based Budgeting" (IBB).

In government, this same concept is termed "performance-based budgeting."

With IBB, budget decisions are based on what the enterprise chooses to "buy" from your organization. Investments are justifiable; alignment with clients' business occurs naturally; and complete financial transparency builds trust.

Once your budget is approved, everybody understands what it does and doesn't pay for, effectively managing expectations. Clients also learn to appreciate the value you deliver.

Allocations are based on true cost and utilization, and clients know what they're getting for their money.

Since costs include appropriate levels of funding for critical sustenance activities, you won't have to cut corners on infrastructure, back off on training and innovation, and overwork your people to attempt to satisfy virtually unlimited expectations.

Throughout the year, product/service costs provide a foundation for portolio-management and business-driven governance processes. Clients can do more than set priorities; they manage a "checkbook" of available resources and understand what it will and won't buy from your product/service catalog with costs.

When costs must be cut, the business must decide what not to buy. Expectations are reduced in conjunction with cost reductions.

Also, chargeback rates can be extracted directly from the budget data. Rates are comparable to external benchmarks (outsourcing), since your costs are fully burdened but don't include anything that a vendor doesn't include (like enterprise-good services).

Quick list of the benefits of investment-based budgeting....

As an added benefit, the process builds an entrepreneurial, customer-focused culture. Managers take responsibility for their businesses within the business, and learn how to plan a business. And teamwork is enhanced when entire project teams and support staff are funded (not just the internal "prime contractor").

More on the transformational impacts....

White paper: Investment-based Budgeting
budgets should be based on the needs of the business, not past years

Why planning and budgeting should be an integrated process....

Why budgeting and rate setting should be an integrated process....

The difference between planning systems and cost-modelling tools....

Problems solved by knowing your full costs....

Quick list of the benefits of investment-based budgeting....

Chapter on the many benefits of developing a budget with product/service costs....

More on how this works....