The truths about budgets, part 1

One of the secretly exciting things about becoming a card-carrying people manager is that the promotion often comes with responsibility for a budget. New managers believe that yes, now I have control, I have a budget, I can make the changes I need to make, I have input into the budget setting process, now I can make a real difference.

Nothing could be further from the truth.

There are actually three major truths about budgets that deserve to be known by everyone in any kind of leadership role:

1. Budgets aren't real money.
2. Any discretionary budget you do have should be managed primarily by your team, not by you alone.
3. No one ever got a promotion or a higher performance evaluation because of their excellence in budget control. (There is one exception to this for a few first-line managers which I will discuss next week.)

Let's take a look at all three of these truths. I'll write today about Truth #1, and next week I'll look more at Truths #2 and #3.

Truth #1: Budgets aren't real money.

This one seems like heresy, but hear me out. Budgets are not money. They have a denomination that looks like money. We talk about them as if they were actual money. We make decisions about them as if they were money.

But budgets are just management control tools. Budgets are set in order to give guidance (or restrictions) to managers about planned spending. Budgets were set months ago, and most of the details were generic or arbitrary ("Let's cut travel budgets next year by 10%.")

Budgets are a mixture of all kinds of different forms of management guidance or control. It is important that you do know some of this in order to have productive conversations with your own manager, and with your finance team.

Here are a few specifics:

• Some budget money will be spent on your behalf for salaries.

There will also be a category for mandatory employee benefits; different companies call this by different names, and they may not even include it specifically in your budget.

Whether you see this or not, rest assured, you can't do anything about it. For many managers, the salary line item could be 85-90% of your total budget. If benefits are included, they may be 3o% of the salary line item.

The only way to "save" any budget money here is when someone leaves your team. You can be sure, though, that if this happens, you aren't going to get the chance to use this money elsewhere. If you are lucky, you might get permission to hire a contractor to fill in for an absent employee. In most cases, though, that savings in employee costs will just go back up the chain to fix some other shortfall in your VP's overall budget.

(An important sidebar: as you are reading this, you may be thinking, "OK, I am a first-line leader, this makes sense. That's why I need to get a promotion, where I can really make a difference."  Yes, there is some flex at the executive level because they know that these gaps happen. Finance teams plan accordingly. But at that level, there is more variability as well. First-line leaders don't often have to worry about making payroll. But ask any entrepreneur or senior leader and they will tell you that larger and more real concerns --making payroll, or making quarterly targets, or covering payments on a large loan--override much of the budgetary flex that they have. Be careful what you wish for!)

• A small amount of budget will appear discretionary – it is your "money" to spend as you choose.

Depending on your department, this could be money for travel, for marketing spending, for outside consultants, any number of items. But again, your ability to spend this money is nearly always subject to the approval – and to be changed at any point – by your own manager.

• Some of your budget may be in internal transfer costs--budget transfers from one internal department to another.

Again, this looks like money, but it is not. It is just an internal management tool. No actual money is involved in these internal transfer payments. The only time that money is REALLY involved in a meaningful way is what I have heard called "green-dollar revenue" or "green-dollar expenses." This is money that is actually received from customers or that is paid to vendors. On the company balance sheet, money from customers or to vendors or employees is real money. It is likely, however, that your own internal budget doesn't reflect this critically important differentiation. Rest assured that your CFO understands.

• There is also a critical difference between "expense dollars" and "capital dollars."

Expense dollars happen this year: travel money, marketing spending (probably), salaries, incentives, and more. Capital dollars are dollars that are spent on machines, property, buildings, equipment, and similar items over time. These two areas are handled very differently in organizational budgets because of the different ways they are treated in taxes and in actual money leaving the organization.

If your organization spends $100,000 on computers, that sum may be spent $10,000 at a time over 10 years, or all $100,000 at once, or some other combination. Expense money goes out the door this year. Your finance team manages these details, and they will work it in their own plan. But again, rest assured that your CFO looks at capital spending very differently than expenses.

• After all of that, you are left with your actual discretionary budget.

For many first-line managers, this may be some money for travel, some money for education, and maybe something left over for a party at the end of the year. And even these categories may get eaten away by spending outside your control: money for everyone to travel to the annual corporate sales rally will be coming out of "your" travel budget, no doubt.

I'll look at Truths #2 and #3 in my next post. I hope these truths aren't too distressing, and it is better to know this up front rather than operate in the dark on these issues.

The real place that you can shine as a leader is how you deal with all of this with your team. As noted, your budget almost certainly is actually tightly controlled from above. But it is your choice on how you manage your budget within your own team.

Let me say that again in a more direct way: the way you manage your budget with your team is a key determiner of whether you are an old-fashioned, command-and-control administrator, or whether you are a true leader, a person who is making a difference for your team.

Budgets aren't money. Budgets are plans and controls and information. As a manager, it is your choice on how you use this information with your team. Old-fashioned managers will use this information for controlling their team, and waste time on budget administrivia. Great leaders will use budgets as a way to build trust, as a tool for planning experiments, and as a way to build a great team.

We'll look at this more on Monday!