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In our rapidly evolving operating environment, agility and efficiency are not just important, they're essential elements of a resilient organisation. The way financial resources are aligned and applied to work can be the biggest catalyst for your organisation's transformation. If you're serious about becoming more agile and efficient, it's time to follow the money.
Lean Budgeting draws from the methodologies of Lean Portfolio Management. It stands out as a transformative approach to managing finance with an emphasis on delivering value and minimising waste. Below are the core aspects of Lean Budgeting, along with some practical insights into adopting this approach.
The Core of Lean Budgeting
At its core, Lean Budgeting is a strategic approach that empowers you to align your organisation's spending with the initiatives that hold the most value. It ensures that resources and people are allocated to work that directly contributes to your overarching goals. This methodology differs from traditional methods in prioritising flexibility, value creation, and continuous flow of work rather than managing work to a fixed plan and associated budget.
Principles of Lean Budgeting
Value Stream Funding
Rather than allocating funding to individual initiatives, Lean Budgeting advocates for funding value streams within the organisation. This allows for more holistic visibility of how financial resources drive value for customers and enhances decision-making and allocation of other resources and people.
It's important to note here that by "value," I don't mean only money, although, of course, money is valuable. Value can also be derived and protected by reducing risk, maintaining compliance, brand reputation, and many other factors depending on your context.
Empowerment and Decentralisation
Teams are empowered with budgeting authority, thereby enhancing responsiveness and reducing bottlenecks. This enables quicker adjustments to changing market conditions or work requirements.
It is important that this coincides with the visibility that value streams provide and works in conjunction with Lean Governance, or Minimum Viable Bureaucracy, as we like to call it.
Iterative Re-evaluation
Budget allocations are reviewed on a rolling basis to ensure spending remains aligned with strategic objectives. This feedback loop also allows for reallocation of resources and people to higher-value initiatives as needs may arise.
Implementing Lean Budgeting
- Identify Value Streams: As with most things Lean, the first step is mapping out the value streams within the organisation. This value stream should start and end with a customer and contain the series of steps to deliver value to them.
- Establish Agile Funding Models: Transition from project-based funding to a model that supports continuous investment in value streams. This involves a mindset shift from seeing budgets as fixed to adaptive. Although it's the subject of another post, this is also a good time to explore the Minimum Viable Bureaucracy (MVB) around funding as well.
- Set Clear Goals: Define measurable goals that align with your organisation's strategic priorities and value streams. This clarity helps in the decision-making required to direct funds to work.
- Empower Cross-Functional Teams: Give teams the autonomy to manage their budgets within the framework of their value stream and MVB. This drives a sense of psychological ownership and accountability and drives efficiency and innovation.
- Adopt a Rolling Forecast: To adapt to changes dynamically, replace annual budget cycles with rolling forecasts. This will allow for frequent adjustments based on actuals, emerging opportunities, and risks. The frequency of these can be determined by how frequently changes are needed, but quarterly is a good place to start.
- Measure and Learn: Establish the metrics you will use to evaluate the impact of this approach. Use these metrics as part of continuous improvement activities to refine your budgeting process and ensure it remains aligned with your strategic objectives.
Wrap it up
Lean Budgeting is a paradigm shift in managing the finances within an organisation, and it offers the pathway to becoming an agile, efficient, and resilient organisation. Taking this in conjunction with the principles and practices of Lean Portfolio Management can further assist in optimising overall competitiveness and capacity to respond to our modern operating environment.
Our business landscape will continue to evolve, and embracing modern and contemporary practices is the key to sustaining growth and achieving long-term success. If you're interested in hearing more about this subject, Lean Portfolio Management, MVB, or others, please check out our free SPARKS download.