We now get a little more granular with the tools we can use to make decisions. Many companies create these tools over time, however, in my experience they often get used less and less until something breaks.
Both of them - budgets and operating standards - are best used as company-wide tools rather than in only one area. In other words, budgets should not be exclusively used by the finance team but rather the leaders of all functional areas. Similarly, operating standards should not only apply to the operations/production/delivery team but rather all functional areas.
One of our Program Partners, Red Granite, did an excellent financial roundtable for us a couple years ago on budgeting and forecasting. One of their main points was that creating a budget was the easy part; the hard part was reviewing and changing it.
That's often because a company doesn't have a process or the right type of financial team to ensure the budget is used effectively. In their experience working with many growth-stage companies, Red Granite uses the following structure to build this process:
- Monthly budget review with all departments
- Review actual results against budget
- Compare full-year forecast to prior month forecast
- Based on results, update forecast for rest of the year
- Revise budget assumptions based on outcomes
What this process does for the company provide better data for decision-making. First, the data is timely, based on a recent month's results. Second, the remainder of the year becomes more clear as time goes on because the forecast is updated based on actual results. And third, the company is getting near-real time feedback on its ability to make assumptions, building a capacity to rely more on objective criteria than subjective criteria.
This is one of my favorite areas of running our business. As a service-based company, we pay a lot of attention to this in our operation, from how we communicate with stakeholders to how we greet them at our sessions to the placement of agendas on tables.
Operating standards are measurable criteria for quality and excellence in how value is delivered to customers. There are many ways to approach them and, in my experience, the easiest one is to ask the simple question, "What is our standard for this?" When it comes to how customer complaints or questions are handled, what happens when a team member calls in sick, or how to ensure that inventory doesn't run out, that question - What is our standard for this? - begins the process of building measurable criteria for quality.
We've also found that making decisions on which operating standards to create is easier when we refer back to our core values. Those have our fundamental beliefs as a business, and one way to set standards is to apply those beliefs to different parts of the company.
For instance, most businesses have a core value that relates to integrity. In that case, the executives can build operating standards by simply asking how their definition of integrity can be applied to their sales process, to managing financials, to employee on-boarding and training, and so on.
Finally, one of the simplest frameworks we've seen to help build operating standards is the "art and science" approach used by one of our Mentors, Nick Sarillo, at Nick's Pizza. In this case, each task in a department is broken down into two areas.
- The "science" includes non-negotiables in executing the task: how quickly phones need to be answered (i.e.: three rings) or what elements need to be included when answering the phone (name, company, etc.).
- The "art" includes those task items that allow for creative freedom: the opening greeting when answering the phone (good morning, hello, etc.) or which order the name and company are said during the greeting.
Having operating standards helps us make decisions by not having to make decisions. What I mean by this is that operating standards are shared with our teams as training and development tools. So when they come to us as leaders and managers, asking how to do something or what we're trying to achieve, we can ask them, "What is our standard?" That empowers them to think or, worst case, ask a teammate or look up the operating standard themselves.