Management Tips

Conflict that Pays: Goals Versus Budgets

Most small businesses owners and managers think goals and budgets are the same thing. Most executives in large high-growth enterprises will tell you these are not the same and should not be confused. So let’s take a closer look.

Budget Purpose:

  • Constrain spending; set limits
  • Hold people accountable for spending
  • Link available cash to spending priorities
  • Define minimum acceptable, low risk performance
  • Define basic conditions of employment

Goals Purpose:

  • Stretch performance and motivate staff to achieve the best of their capabilities
  • Unconstrained aspirations combined with a degree of realism
  • Stretch beyond the comfort zone – create a healthy tension
  • Set the basis for rewards (rewards should apply to stretching, not for doing the minimum)

It is very likely that achieving stretch goals will require re-negotiation of the budget. But you certainly wouldn’t want to increase the budget if the team is under-performing.

When goals are tied to budgets, there is a high probability that problems will result. For example, if goals are set to match the budget, it usually means the goals are basic and easy to attain. Conservative goals often result in making everyone comfortable but produce lackluster results. This is usually discouraging for high performers, favors lower performers, and sets the cultural norm for the company.

Conversely, if budgets start high to match aggressive goals, spending will be excessive if goals are not being met. If spending starts high to support aggressive goals, it is usually impossible to recover the excess spending if goals are not being hit. Whenever possible, solid progress toward stretch goals should lead the way to increasing the budget. Not the other way around.

There is a delicate balance here. It takes experience to get this right. Ideally, spending plans should be well inside the safety zone and performance goals should be on the edge, putting pressure on the spending plan.

Another key to success is getting the whole team involved in the planning. The team needs to understand the dual nature of budgets and goals and they need to be included in the thought process of building the two. When budgets and goals are created in the back room and simply handed to the team, it is likely that the team will be skeptical and even cynical. Getting the team involved in the planning process and committed to achieving goals can profoundly improve business results and be highly motivating. Hitting budget can be somewhat satisfying but certainly not as motivating as hitting lofty goals and breaking a sweat.