One of the worst things about budgeting is that it tends to lock in your resource spend for the coming year. Too often we hear, “If it’s not in the budget, you can’t spend the money.”
But what if things change and one initiative won’t work, but another would that requires more of the budget? Sometimes, if it’s not in the budget, both initiatives will suffer and less value will be created—or perhaps value is even destroyed because both initiatives will suffocate and the investments already made are lost. Logically, this doesn’t make sense. If it sounds like your FP&A department, you need to prepare for change!
Liquid resourcing is the answer
So what kind of change should you make? I have previously advocated that you must go to a model where the “bank” is open 24/7/365 so that funds can always be allocated to sound initiatives, and initiatives that don’t pan out will be closed—as opposed continuing to spend the money just because it was in the budget. This should be a simple and sound principle; however, in most companies, resources are already tied up in fixed or semi-fixed expenses and committed investments. That’s why we need to make a few changes to get there. Here are some concrete tips on how you can do it:
- To be able to spend money, it needs to be available. This means you should be freeing up resources continually so you have them available once you need to deploy them.
- Move to an 80% budget, where at least 20% of your resources can always be contested and used for the big moves you’re trying to make.
- Start charging opportunity costs for managers to use resources—meaning they need to deliver a positive economic profit to be allowed to spend resources.
As you can see, the main principle is to free up resources so you have the money to spend. FP&A should always have a list of the next initiatives in line to be cut to free up resources. Just because an initiative got approved once it doesn’t mean it has carte blanche to spend all the allocated resources. It must deliver on the promised milestones and if not, it should be cut and considered a sunk cost.
FP&A should own the company money box
This is not to say that FP&A gets to decide who can spend money and who can’t. However, the department should govern the principles for spending money and facilitate the constant resource reallocation in the company. FP&A must also take responsibility for ensuring that resources are always available to spend on moving the strategy in the right direction.
This will require skillful stakeholder management from the FP&A department, which is why it’s also recommendable to apply a business partnering approach to get to a point where business managers and executives trust FP&A’s “no” as much as they’ll happily trust the “yes.”
However, this is a must-win battle for FP&A. If there are no liquid resources in the company, how can you make any headway toward achieving strategic success? There are clear tangible actions here for FP&A to implement, so tell me: What more do you need to fundamentally change your company’s resource allocation with the aim to increase the odds of succeeding with your strategy?