There are quite a few myths and misconceptions surrounding budgets, but three that I find to be very harmful to individuals and organizations. Listen in to this episode to learn how you can avoid the pain of believing these fake numbers and misconceptions.
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Transcript
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Welcome to another episode of jamming with Jason and today we are going to be talking about budgets, I’m budgets. Okay.
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Now before we get into our discussion of that topic today I wanted to take just a minute and kind of do a little public service announcement for people
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Because this is one of the things that I’ve been experiencing myself and see that I’m guessing that other people are experiencing this as well. And it relates to social media.
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I have been getting a lot of fake people requesting to connect with me on LinkedIn and Facebook. So not sure if you’re experiencing that as well.
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But this morning. I actually got a connection request from the crown prince of Dubai, which again is not not unusual since I’ve done a lot of work in Dubai over the years. But when I looked at the profile.
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Shake calm down only have 13 connections. So that tells me that it’s probably someone pretending to be him.
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Now here’s the sad thing. Some of the people that I’m connected with had already connected to this fake profile.
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And so, you know, again, if it only has 13 connections. I’m pretty sure that is not a real person. So be aware, don’t just blindly accept connection requests from people
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So with that, let me just give you a couple of tips here about social media in general. Now, most of the time I hang out on LinkedIn.
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And if you’re a regular listener of the podcast. I would love to connect with you on LinkedIn.
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And so I’m actually going to leave in the show notes, my direct profile link so you can go out there and actually connect with me.
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But do me a favor. Because like I said, I get so many fake connection requests. When you send me the connection request, do the personalization.
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So if you’re on your computer and you click Connect. It’ll ask if you want to personalize it if you’re on your phone. Don’t just click the Connect button, actually.
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Click on the little three dots over to the right. And from that you can have an option to personalize request because here’s the issue. I get a lot of
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requests from people. But if you send me a personal request and, especially, like I said, if you’re a listener of the podcast and say something like
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Hey Jason listen to the podcast. Love it. Would love to connect with you on LinkedIn. I’ll connect with you. And we can actually have a real conversation.
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Because you know that it’s me on the other side and I have more confidence that it’s actually a real person on your side as as well. And we can actually have that conversation.
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So one of the things to do is if you want to connect with people, make sure that you send them a personalized request or connection request so that way they actually know
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Why you want to connect with them who you are and that’s one of the big steps in actually starting an online relationship with somebody
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Because like I said, I do get a lot of different connection requests. In fact, sometimes I get them from people I know.
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Have been dead for several years. And so again, just, just be careful of that and realize that there’s lots of people out there that are trying to steal your information.
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And access your network. So just be a little cautious. Okay, so that’s enough of the public service announcement, not to try to scare everybody
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But like I said, I’ve been experiencing this a lot more the last month or two, and so wanted to make sure that you were aware of that and out there.
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And like I said, if you’re a regular listener to this, you’re an internal audit risk compliance. You’re a chief audit executive
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I want to connect with you. So please make sure and click on the link, because I would love to connect with you on LinkedIn, so that we can continue our relationship online.
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As well as you just listening to me. Each week so alright with that, let’s get into the topic of budgets.
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Now some of you as you look to the title of this might be saying, Jason, you’re kind of crazy. What do you mean budget and FAKE NUMBERS.
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Well, you know, the last year to we’ve been hearing a lot of stuff about fake news fake news. Right. Well, a lot of times budgets are actually FAKE NUMBERS.
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And people don’t realize that. So one of my jobs or one of the things that I see that I’m here to try to help you do is to understand what the world is really like.
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And in maybe break some of those myths or misconceptions that people have
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Around certain things and one of those is budgets. And so what I want to do today is go through and talk about, there’s really kind of three.
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Misconceptions about budgets that I want to help share with you so that you don’t end up in the trap of believing, some of these things.
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Because actually, believing these things can be harmful to you. Okay, so the first one is that there’s a lot of people that believe that budgets are controls. Okay. And that is not the case.
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Okay, having a budget is not necessarily a control. Now you can argue that it’s maybe a monitoring, control by finance or by others, to make sure that
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You know, we’re not spending too much and get ourselves into trouble from a cash flow perspective. And believe me, I get that. I, I understand that budgets are an important part
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Of running a business of trying to, you know, have that stewardship over the money and make sure that you are spending.
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In investing in the ways that you need to to help you achieve your objectives, but here’s the issue with with it around controls.
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You may be able to argue that it is a control, but I will tell you, it is a very effective control if it is even a control at all. And here’s the reason.
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Budgets are made up numbers at the beginning of the year. No one can accurately predict exactly how much you will spend and when you will spend those amounts over the course of the year.
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It’s a planning tool right to help us manage our cash flow and also to make sure that, again, we’re not. We’re not going crazy on purchasing things that we do not need to purchase and I understand that side of it. But here’s the thing. I’ve actually seen in my own career.
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When actually equal budget. Okay, so if someone or, you know, a certain manager and apartment, if they are always consistently exactly on budget.
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There’s usually fraud going on. And the reason is because no one can accurately estimate exactly what they’re going to spend
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And so one of the fraud schemes that some people have used and that I’ve seen in my career.
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Is if they’re going through the year. And they know that they’re going to be under budget that’s a perfect opportunity for them to put in, you know, fake or fraudulent invoices.
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To make sure that they end up kind of right at budget because if you’re right at budget than most of the time people are not questioning you
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And again, like I said, that is one of the reasons why budgets are ineffective because as a control because most of the time. People think if actual equals budget, then everything must be okay.
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But what I’m telling you is if budget equals actual there’s a problem. People should be under budget or over budget if they’re exactly on budget, there’s probably some funny business going on.
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In their numbers. So again, from an internal audit perspective that can be again one of those things that you may be monitoring.
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To try to identify where fraud could be occurring in your organization.
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So that’s the first thing is that, you know, a lot of times people believe that budgets are a control. And like I said, they’re not really a control and and in fact the way most people think of them or try to use them as a control.
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Is very ineffective. Okay, so the second one that I want to get into. It’s kind of another misconception around budgets.
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And that is that sometimes people believe that budget numbers are real. And as I told you before, budget numbers are not real.
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Budget is an estimate of what you think you will spend during the year, it will not match exactly with what you’re going to spend
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And here’s the reason. Right. You, you create budgets, usually a year in advance. You have no idea. Right. A year ago, what you are actually going to be encountering. And so because of that.
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They’re, they’re not actually real numbers. It’s an estimate. It’s something that you’re projecting, but it will not equal the actual of what happens. And let me give you a real, real life experience for me. And one of my companies.
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Every month I would get a call from accounting
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And the call went pretty much the same. And I’m just going to kind of give you some some facts around it so that you can kind of understand where we’re going with this.
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So, and I’m going to use make made up numbers because it was a while ago. I can’t remember what the actual numbers were but I’m on one of the line items in my, in my budget.
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I had estimated that I was probably going to spend around $25,000 during the year, on this particular thing.
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Now I did not know for sure what the amount was going to be. I was estimating. It was probably around $25,000 I didn’t know which month during this next fiscal year.
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That that expense would actually come through. So if I if I knew or I estimated. Let’s say that it was going to be in August, then I would have put all $25,000 in my august budget number
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But like I said, I didn’t know what that was. And so during the budgeting process our company, we would just split up. So again, if I thought it was going to be about 25,000
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I would split up and say, Why don’t you just charge my budget $2,000 each year or each month we’re going to estimate it’s probably going to be 2000 a month over the course of the year. That’s $24,000 that’s very close to my
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Since I don’t know which month it’s going to happen in will just spread that cost out over the course of the whole year. Okay.
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So in my budget on that line item I was expecting to spend on average $2,000 each month.
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Now the first couple of months went through and I hadn’t spent the budget yet because I hadn’t done that particular project that required me to use the money.
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So after a couple of months. Someone from accounting would call me and they would say, Jason. I was looking at your budget numbers and I notice that you are behind on your budget, you’ve estimated $2,000 a month.
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But you haven’t spent anything on that. And I would say yes. And I would explain to them I estimated that over the course of the year would probably be around 24 $25,000
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I didn’t know for sure, which month that was going to be in. That’s why I’m under budget. Currently, okay. I had the discussion with them thought everything was good.
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The next month, they would call again. And they would say, Jason, we notice again that you are under budget, why are you under budget.
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I would go through and explain the same thing again and again, thinking that this was going to be done now.
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The problem is the person in accounting just couldn’t understand or wrap their head around that, because I had put $2,000 in my budget each month.
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They expected to see a cost for $2,000 every month. And it wasn’t there. So again, it’s not a real number. It’s what I was estimating that I was going to have. So fast forward a few months.
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And around the middle of the year, we ended up doing the project. And so I spent $25,000 okay so i budgeted 24 2000 every month.
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Thought it was going to be around the 25 it came in, let’s say, at $25,000 so now all of a sudden the monthly calls changed because again I was getting this call every month from this person accounting
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And wasting my time and wasting their time. Well, middle of the year when I actually spent the money, then the call said, Jason. You’re over budget, why are you over budget.
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And I would have to again go in and explain to them over the course of the year. I didn’t know when it was going to be. But at some point I was going to spend $25,000
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I spent $25,000 last month. That’s why I am over budget during this particular month. And again, those calls would happen every single month now.
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Budgets are estimates. They are fake numbers but but believing that they are real and going through that level of detail was a big waste of time for me and for that person and accounting
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Because like I said every month, you know, I could figure, pretty much on a certain day after a month and
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My phone would ring I would look down and see that it was the same person calling me every month. And we would have to have the same discussion.
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So again, believing that budgets are real numbers actually waste a lot of people’s time in trying to explain why you’re a little bit over why you’re a little bit under budget.
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And like I said this, this takes up an enormous amount of time and it’s a big waste of time for most organizations, because they place too much reliance
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On the budget numbers which, as I said before, are just an estimate. They are fake numbers because we don’t know exactly what it’s going to be until we actually incur the expense now that moves us on to the third item.
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That I see a lot of people. That’s again a myth. And this is one of the things that ends up hurting. A lot of people as well.
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Is the belief that I don’t have the budget, it wasn’t budgeted for so I can’t do this. And I hear this a lot of time from people, you know, something comes along, during the year that you hadn’t anticipated surprise.
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Okay, I’ll tell you every year, there’s going to be something that comes along that you didn’t anticipate, because again, you’re trying to make an estimate a year ago.
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As to what you think the current is going to be, and it’s not going to be that way. Okay. So, inevitably every year there are going to be things that come up
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Now some of those things could be you know cost saving measures where if I invest a little bit of money. Now, maybe I save money in the future.
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It could be a new opportunity that comes along, right, have a new product, a new, whatever it happens to be.
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And I see people that stop and say, well, this is a great idea, but I don’t have the budget for it. So I can’t do this thing to take advantage of this new opportunity.
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And that hurts businesses, when you do that. Okay, let me use an analogy to try to explain this to you.
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If you know I’ve got two cars. My wife has a car. I have a car because we need to be able to travel and go where we need to go right
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And so as an example, my wife needs to use her car to go to work, five days a week.
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Now obviously in our personal budget, we have kind of some money that set aside that we know how much we’re going to have to pay for gasoline or petroleum depending on where you’re at in the world.
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For different repairs and other things like that. So we’re saving aside some money worked. We’re trying to budget, but we don’t know exactly when something is going to happen.
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So imagine if my wife goes out to the car and we realize that there’s something terribly wrong with the car and the car needs $2,000 worth of repairs. Okay.
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because something happened that we hadn’t anticipated. Now we could sit back and say, well, we don’t have the budget for that. And so, you know, until we have the budget to fix the car.
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I’m sorry, honey, but you’re just not going to be able to go to work. You’re just not going to be able to use that car because I didn’t budget for that $2,000 repair.
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Now think about that. That’d be really silly for me to say, wouldn’t it, because again, she needs to use that to be able to go to work to earn money.
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And so what inevitably happens. This is what I’m saying happens a lot in businesses is things will happen. You didn’t expect.
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There’s a new training you wanted to go to. There’s a new opportunity for cost savings that you hadn’t figured before don’t use the excuse of I don’t have budget.
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For you, not to take action on those things. Right. So again, now maybe I hadn’t budgeted for that $2,000 expense on the car. But it’s important to me.
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And I need to find a way to make that happen because just sitting back and having an excuse and saying, I don’t have the budget is not going to help me accomplish my objectives.
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And so again, realize that those things are going to come up during the year, because like I said, I see businesses and and professionals, all the time.
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Using this as an example as as as a an excuse for them not to take action and inevitably what ends up happening when you use an excuse. Like, I don’t have the budget.
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Then you’re probably hurting yourself and hurting your organization because you’re forgoing or not doing something that you need to do.
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Okay, so as kind of a little wrap up right there are some misconceptions about budgeting and I don’t want you to get caught into those traps, you know, don’t believe that they are really a strong control realize that if they even are a control. It’s usually a very ineffective control.
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Don’t believe that the the budget numbers are actually real numbers because they are estimates. And again, don’t get into that habit of using an excuse of saying, I don’t have budget.
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If it’s something that’s important. If it’s something that you need to do, then you need to find the money to do that.
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Now some tips and tricks to do that is obviously making sure that you’re trying to estimate or budget.
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For some unexpected things during the year. Right. And so a lot of times, I will. I’ll tell people, as an example, chief executives that I coach.
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To say, look, you know, what if you think you’re going to spend $150,000 on this particular thing. Give it a little extra cushion put in 175 or 200
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Because during the year, there’s probably going to be something that’s going to come up that you haven’t anticipated.
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And so try to have some of those things thought about. But again, you will not be able to think about everything there will be things that come through and you may need to go back and ask for more budget.
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If that’s the case, and again, you just need to go through the process of being able to have the courage to ask for it. If you really need it.
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And also to be able to know how to create the business plan and calculate a return on investment, because again, like I said, if you come up with, let’s say, an idea.
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To where in future years. You can save you know $200,000 a year, but it’s going to require you to spend 50,000 in the current year that was not budgeted for
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Well, you need to figure that out and go, look, this is going to save us $200,000 for the next five years. That’s a million dollars worth of savings if I spend 50,000 today.
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When you go to your CFO with that sort of information that’s backed up by the numbers. Let’s see here. If I, if I’m a very smart CFO and somebody comes to me and says, If you invest $50,000 you’re going to get a million dollar return. Does that sound like something as CFO would like
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They should be they’re thinking, right, if they’re a good CFO. Now, if they’re caught in the same budget trap and say,
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Well, you know, the problem is we’re just going to have to let that million dollars go because we just don’t have 50,000 in the budget this year. That would be really stupid. Okay, so again,
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Some of the misconceptions that I see around budget. And like I said, the reason I’m bringing this up is I just see a lot of people falling into that trap and I don’t want you to fall into that trap as well.
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Because when you believe things that are not true, you end up hurting yourself and you hurt your organization. And I don’t want that. So with that, my friends of theirs, some of the misconceptions about budget.
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Let me know what you think. Like I said over over a long career working with lots of companies I just see these as being some things that
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A lot of people believe that are incorrect. So with that, go out. Think about how you can do things different this week and be able to provide more value to your organization and I’ll catch you on a future episode of jammin with Jason. See you.
