The most common financial mistakes managers make
In many organizations managers are not taught how to manage their budgets. In some cases managers are given budget responsibility but not budget authority. In these organizations it takes 5 levels of signatures to get a few hundred dollars approved. Worst, managers are given both responsibility and accountability but little financial training. As a result, budget forecasts are a guess; managers tend to spend whatever they have, because they are afraid if they don’t, their next quarter budgets will be reduced. Revenue goals or plain budget goals are not based on data from customers or trends; they are simply numbers picked from the sky. If the organization grew 5 % last year then 10 % would be a better goal for this year. The problem with financial projections starts when programs and projects get either overfunded or underfunded based on the initial projections which were not made with financial integrity.
What is financial integrity?
Financial integrity is having a system of budgeting and spending open, easy to understand, and based on data. Projections are based on real trends, real customer orders, and consistent with past earning and spending. When managers cover up budgets to hide either overspending or spending enough to justify next quarter’s budget, integrity is compromised.
How to role model financial integrity
Best Managers plan and communicate spending in clear ways. People understand what decisions and assumptions guided financial decisions and spending. All employees have access to the financial progress in the organization so they can contribute. Employees are given the opportunity to learn about preparing a budget, forecast, and related terms. With open communication, managers can be given responsibility and authority to approve or deny spending. Financial bureaucracy is reduced when people understand how money and spending flows in the organization.
Put new financial measures in place
During a financial crisis many times managers are forced to reduce spending. They are rarely given the opportunity to increase earning. The best manager puts key operational methods in place to ensure financial integrity. First, spending and earning trends are open and available to all employees. This helps people to feel vested and make better decisions. Second, there are regular operational reviews to discuss spending and earnings. The more managers know the more chances they can make better decisions with their spending. Group budgets are built with managers not simply rolled downhill, which is usually the case from the finance department. Quarterly forecasts are built after reviewing customer data, trends, and current spending. Some areas may require more spending and others less.
Educating the workforce
The best managers educate the workforce on finances. I knew one organization which offered a personal finance class for all employees. This helped to educate people about their own money so they would be more sensitive to the organization’s spending.
Telling the truth about money
Sadly, many public organizations today micro-manage their finances to tell the story which analysts, investors, and others want to hear. Many times numbers are manipulated, changed, modified to meet external projections and demands. As a result, it becomes more difficult to manage internal spending and earnings when the numbers get changed to meet the expectation of a specific audience. The best manager is open and consistent with the spending and earning. As a result, people, who work to produce the revenue, have a stronger commitment to financial integrity.
Learning summary and next steps
What processes do you have in place to forecast and manage revenue and spending? Is it based on data and actual customer orders or are these numbers simply made up as you go to meet targets and bonuses? What education can you put in place to educate better all employees on the finances of the organization? How can you give them financial education to help them improve their own finances and to help them to become more sensitive to the money flow at work? What financial review processes can you put into place so that all employees can become more aware of how the organization is doing with regards to spending and revenue?