Category Archives: Budgets

What is a “Plug”?

For some reason, I have been reading and thinking about forecasting for the last little while. One of the words that seems to be popping up more and more frequently in the business literature with respect to forecasting is the word “plug”. I have actually heard this word in past forecasting meetings that I have attended. I thought I might delve in a level deeper than just understanding forecasting, and look into one of the more favored words in the forecasting vernacular: “plug”.

Plug is an interesting word. The dictionary defines it as both a noun (a thing) and a verb (an action). I’ve also talked about words like this before. You used to go to a party, and now you can also go and party. I think that plug is a much earlier iteration of this particular phenomena. Usually a word is used as either a noun or a verb. I am not so sure that this is the case with the word plug when it comes to its business usage. I think that when you hear the word “plug” in business, it is both a thing and an action at the same time.

As a noun plug can usually mean either:

“an obstruction blocking a hole, pipe, etc.” or “a device for making an electrical connection, especially between an appliance and a power supply…”.

As a verb Plug can usually mean either:

“block or fill in (a hole or cavity)” or “mention (a product, event, or establishment) publicly in order to promote it.”

For now, I think I’ll ignore the appliance power cord and product promotion definitions for obvious reasons, and focus on the other two.

As the ends of various months, quarters, and years come into view, forecasting takes on a role of increased importance. Depending on the business performance, as these end of period times roll around forecasting can take on both a greater frequency and intensity, especially if the numbers are not in management’s desired range. As I have noted, forecasting is essentially the comparing of what you think the numbers are going to be with what you want the numbers to be.

I have also noted the “volumetric force” associated with forecasts. This is the management drive and desire for all forecasts to be either at or exceeding the desired targets. This desire to respond to or please management has a tendency to render forecasts possibly slightly more optimistic than what they might normally be, so that management can smile. But what do you do when the forecast obviously does not meet the desired levels?

You insert what is called a plug into the forecast.

You find a way to provide the management desired levels in the forecast numbers. You forecast the performance that is defined, and then you add in an amount equal to the difference between the goal and the defined forecast, which is undefined. This undefined amount is known as the “plug”.

You are in effect using the verb definition of the word “plug” as a noun. You are essentially filling a hole (a verb) in the forecast with a plug (a thing). It is normally the noun function that is turned into a verb, but here we have the verb function that is turned into a noun.

I guess it is a little thing (a very little thing) but it amuses me, so I have included it.

I have also noted in the past that if a forecast is knowingly presented to management, and it does not at least meet the desired targets, that whoever submits such a lacking forecast could be subject to a significant amount of incremental management attention and assistance. As I also noted this attention and assistance will usually continue until the forecast realigns with the desired targets.

The quicker the plug is inserted into the forecast; the faster management can feel better about the forecast.

I think this may somehow be related to the genesis of the saying “The beatings will continue until morale improves.” This quote is attributed to Captain Bligh, or the HMS Bounty, when told of the forecast associated with how the crew felt about reaching Pitcairn’s Island. It is also apparently quite applicable to a multitude of other management groups.

Plugs were developed in forecasts as a way to create a real and accurate forecast (that potentially does not meet management expectations), yet also provide an acknowledgement of the expectations of management in order to avoid the incremental assistance of management. Plugs are the as yet unidentified portion of a forecast, that will (hopefully) be defined in the future, and will result in the meeting of the desired targets.

This results in the equation:

Actual Forecast + Unidentified Forecast (Plug) = Presented Forecast

Plugs are an acknowledgement that the actual forecast doesn’t meet the desired levels, but the miss to forecast has been identified and is being worked, so that extra management reviews of the forecast (or beatings, as the case may be) are not going to be necessary.

On the surface, this type of forecasting technique sounds great. The actual forecast can be presented to management, as well as the desired number that management wants to see. They get both reality and what they want.

However, if you are going to use the Plug Gambit in a forecast, you need to understand that it is a double-edged sword, and it has a limited shelf life. It is a double-edged sword in that a forecast is being presented to management that is in essence telling them that their desired number is going to be achieved. If it is not, then there will be significant, and now merited management attention visited upon those that delivered such a faulty forecast.

The plug in a forecast also has a limited shelf life in that it is expected to reduce as time passes, and the measurement period draws to a close. An example is that a plug in a forecast during the first month of a three-month quarter might be acceptable. However, the same plug in the third month of a quarter should definitely garner incremental management attention.

So, there you have it. A plug is an artifice, inserted into a forecast in order to avoid (at least temporarily) unwanted incremental management attention associated with the forecast. It is an identified amount, but from an unidentified source. It can be sales to unidentified customers, or cost reduction from unidentified actions.

Once a plug has been inserted into a forecast, it is almost impossible to improve the level of the forecast. This is because as new opportunities are identified, they reduce the amount of the plug, as opposed to actually improving the forecast.

With this in mind, it is my understanding that the latest management approach to limiting the use of plugs in forecast is to in fact request and drive for improvements to any forecast that does contain a plug. This has the effect of requiring double the desired growth as the plug must first be filled before the forecast can be increased. This move by management will no doubt engender some as yet unknown, new methodology for forecasting, as the ongoing escalation associated with business forecasting continues.

This is very similar to the idea that the fastest cheetahs only caught the slowest gazelles. This natural selection meant that only the fastest gazelles (and cheetahs) survived. The ongoing evolutionary race is forecasted to continue going forward on the African Savannah.

However, I think it is pretty obvious that in this example, gazelles do not get to insert plugs into their speed forecast.

Growth Industry

I think it is safe to say that most everyone is looking for their next career opportunity. What do they do next? Where do they go next? What is the next step in their career progression? When I have been asked in the past what someone’s next career step might ought to be I have invariably said that everyone should spend some time in sales, and that everyone should do whatever they can to be able to understand the business numbers.

I am not going to back away from that comment. Good leadership needs to understand what it takes (and just how difficult it is) to generate a top line. No matter what everyone who has not been in sales may think, I have found that it is just not that easy to get someone to give you their money, regardless of how good the product or service is that you are selling. (Apple products don’t count here. I truly believe that customer set has been brain washed.) Even so, I think we have all been in situations where management has predicated all of their well scripted strategies for sales growth, regardless of product, business or market conditions, only to miss those growth targets and then try to deal with the business consequences.

I also stand by the assertion that numbers, and derivation of such numbers (or in some cases the divination of said numbers) is required for business and organizational operation. I have cited several quotes on numbers in the past. Robert Heinlein said “If it can’t be expressed in numbers it is opinion not science.” Mark Twain said “There are lies, damn lies, and then there are statistics.” A leader’s long term (and short term) success will be based on their ability to understand and communicate what the business’ numbers are, and why they are what they are.

What I think I am now going to add to these two suggested experiential requirement sets is that leadership needs to spend some time in what my experience has proven to be the only consistent growth industry that I have seen across all industries, markets and businesses: Cost Reduction.

In business there are many things that can (hopefully) be influenced in business performance, but very few things that can truly be controlled. Businesses can try and influence the market to perceive them differently. They can employ various media and advertizing to try and create a progressive image in the market for their goods and services. They are in essence trying to convince the market of their particular product or service advantages and benefits.

Whether or not the market accepts, agrees or is influenced by this positioning is outside the direct control of the business. The business will always try and craft its market message in the most beneficial light possible, but it is the market which gets to decide which parts if any in the message and value proposition are accepted. Entire industries of analysts and consultants have grown up around this market value proposition analysis in efforts to try and actually decipher the facts associated with these messages.

Whether individual customers accept or agree with the proposed business value proposition is also somewhat outside the control of the business. The business can employ dedicated sales staffs and teams to tailor the message specifically to each customer as well as work to identify the value of the solution to that customer. This provides greater input and positioning for the business, but yet again it is the customer that ultimately controls the relative success of the business proposition. They get to say “yes” or “no” to the proposition.

The point here is that a business can do absolutely everything right in the dissemination of its message to the market and its pursuit of the ever elusive customer order, and still fail, sometimes for reasons that are entirely outside the control of the business. They can work and influence and sell in every way imaginable and still not get the order, or enjoy the top line growth they have planned for and need.

Herein lays the rub.

Senior management doesn’t really care about that. A plan has been made and the numbers have been committed. Those numbers have been combined with the overall organization’s other business’s numbers and an total organizational plan has been committed to the corporate leadership. You don’t get to easily miss your financial commitments to the organization.

Where do you think all those ideas for those colorful punishments on your favorite Game of Thrones or Walking Dead television shows came from? Exactly, people who missed their planned or forecasted targets.

While it may be generally frowned upon by senior management to miss the top line plans and forecasts for growth, it is wholly unacceptable and more than likely to be a punishable offense to miss the business profitability and earnings commitments. Herein lies the squeeze: While the top line may not be achieving the required heights, the profitability and earnings commitments to the organization cannot be reduced proportionately, if at all.

The only solution is to cost reduce.

I don’t want to make it sound as if cost reduction is only something to be taken on in times of business stress or top line under performance. It may have once been that way, although I cannot remember it. Suffice it to say in today’s day and age that for a healthy business cost reduction is both a growth business and a never ending process. If you are not doing it now, you had better get started because it will probably be necessary sooner rather than later.

It is well known that the sooner you can make adjustments of any kind in a business year, the less drastic the adjustments need to be. If you can recognize in month two that there is an issue, you have ten months to correct. If the issue is not recognized until month seven, you only have five months to correct, and now the correction must be twice as large.

What I mean here is that if there is a one million dollar short fall in the earnings commitment / forecast and it is recognized in February, you can correct spending (costs) to the tune of one hundred thousand dollars a month. If the same one million dollar issue is recognized in July, you will need to reduce costs by two hundred thousand dollars a month to recoup the same million dollar correction.

Remember that. The later you wait, the more drastic the cost reduction action will have to be. Plan early, act early. Hoping things that are not fully within your control (sales) will improve usually results in much more painful activities associated with those things that you can in fact control – costs.

There are all kinds of costs associated with a business, not just people costs. Here is where knowing the numbers thing comes into play. What are these costs? How do you control or reduce them? And, almost more importantly, how long will it take to implement the changes associated with reducing them?

We have probably all seen these knee-jerk cost reduction actions:

Travel bans – which basically just limited the people who should be traveling and not so much reducing the number of people who shouldn’t have been traveling in the first place. Travel is not a light switch with only the “On” and “Off” positions.

Hiring Freezes – that really aren’t freezes because there will always be the need for the flow of the life blood of new talent that every organization requires.

I have even seen the removal of coffee and other amenities from the corporate break rooms. I don’t know how much was saved, but it did succeed in generating a significant number of grumpy people.

There are any number of other “cost reductions” of these types, but they are for the most part superficial. They do not address the specific issue that the business’s basic cost structure does not match its revenue and hence earnings positions. True cost reduction comes from addressing the long term and fixed costs associated with a business. Can fixed assets be reduced? If so, how and how long till they are affected? Is there outsourcing or off shoring that may be needed? Not everyone can be the best at everything, so looking for external help may be a potential solution. Are there allocations or other programs that need to be reviewed? The list goes on, but the costs must be dug out, isolated and analyzed before action can or should be taken.

This activity will serve to teach the leader, or would be leader what the costs are, in human terms or otherwise, associated with cost reduction. Changing the course or the costs associated with a business is much more fundamental than just freezing travel or hiring. It is also much more invasive. It’s not easy. You have to challenge yourself, your team and your business to change, and that is never easy. No preconceptions regarding business costs should be exempt. All costs should be questioned. When addressing cost reduction, remember what Sun Tzu said about war (as in this case they will be somewhat similar):

“The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.”

So is the art of cost reduction.

Budgets


Everybody lives on a budget. Well almost everybody. It seems the US congress hasn’t needed a budget for the last few years so they haven’t bothered to create one. I guess that comes from the fact that if they need more money they can just trot down to the treasury and print some more. They also have the added benefit that if they spend more than they actually have no one seems to mind.  Aside from that one glaring exception we all must live within our means, and that means we have a budget.



The same principle should apply to business. Organizations should have goals, and for the most part these goals need to be quantitative. In case you are missing the link here, goals and budgets should be closely related.



Budgets are great management tools in that they provide goals, but they are goals that have a certain amount of variability based on business levels and directions. They provide both statistical as well as real number targets for leaders to manage to. This enables the business leader to have some leeway and variability of the budget goals based on the overall business performance. It allows them to make business decisions and to manage.




Warren Buffet, who is widely thought of as one of the wisest and most capable business men around, has also come out in favor of budgets, specifically with respect to the aforementioned members of congress. His approach to having congress set and operate within budget, and like the rest of us live within it was simple. He said:




“…pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”




He was saying that the US government budget would be linked to the GDP measurement and must be within three percent of it. I like the sentiment, but the only problem with this solution is that those that would be measured and or limited by the budget, are also those that would have to “pass a law” requiring it. Past experience does not indicate there is a willingness within the congress for this type of behavior.



Regardless of that, the budget approach is correct. If there is a good economy and GDP rises, then there is more money for congress to spend. If there is a poor economy and GDP stays flat or worse, falls, then there is not as much money to spend. And just like a business that sees its revenues fall, cuts in its spending must occur.




Lets again look at what has become one of my favorite discussion topics in business: travel. I have traveled a lot for business in the past, and don’t particularly relish the thought of future business travel, but I absolutely agree that some travel is required for successful business to be conducted. There is no substitute for face to face contact, either with customers or with other members of the business unit. I also understand that travel costs money and there is a finite amount of cost that any business can bear and still be both viable and profitable.



All business groups or functions should have a travel budget. It should be expressed both in real dollar terms, and as a percentage of revenue terms. If times are good and the business is growing it should be expected that revenue will be growing and there will be more customers to visit and that the actual amount spent on travel may be more that the real dollar target, but it can still be in line with (but hopefully less than) the statistical percentage of revenue. The idea here is that you don’t want to limit your revenue growth because you decided to limit your travel to a fixed dollar level.




Just as in tougher business times you would not want your travel expense to meet the dollar level set in the budget when revenues fell short of their projected levels. This would cause travel to increase as a proportion of revenue to a statistically unacceptable level of revenue. This would adversely affect the business’ profitability. If the overall business levels are reasonably accurate, then both the fixed level and statistical level targets can be used as measurements.



Rewards can be provided for achieving budget goals and penalties or reduced rewards assessed for not achieving them. This logic can then be applied across the entire business against almost all cost categories as well as most revenue structures. If the business has time sensitive aspects then the amount of time that is budgeted per project or event can be used in the same manner. If the business is service oriented as opposed to product oriented then the number of labor hours, or the number of employees associated with conducting the desired level of business can be budgeted.



Good leaders will understand the various trade-offs that will come into play with the various goals and budgets that they have to attain and work with. Leaders that consistently work within their overall budget constraints, either real dollar, statistical or both depending on prevailing business conditions and the accuracy of the initial conditions, should be rewarded both monetarily as well as with increased responsibilities over time as they have demonstrated good stewardship of the business. Those that don’t demonstrate these traits should not expect these types of rewards.




I stated “over time” as a criteria as there will always be a stochastic or unpredictable aspect associated with business. That means that sometimes you can and will do everything right regarding your budgets and objective, but there will be unexpected events outside of your control such as disruptions in supply chains, natural disasters, changes to commerce laws, etc. that will preclude you from being successful.




It happens.




It doesn’t happen all the time though. Many of the issues can be predicted and de-risked. Those leaders that can predict and prepare for these unforeseen events will minimize their affects, continue to be able to perform, and progress. Those that can’t handle these types of events will need to learn the requisite skills if they wish to continue to advance.




Senior management cannot and should not try to both set objectives and then dictate how the business leaders are to achieve these goals or operate within these budgets. It usually neither works nor enables the next generation of senior leaders to grow into their future roles. One size does not fit all and differing leaders will have differing approaches to solving their specific problems.




Setting both goals and budgets enables leaders to understand what is expected both on an overall basis as well as on an individual or specific budget basis. It also enables those leaders to make decisions regarding tradeoffs within the specific budget structures as to enable the attainment of the overall organization’s goal. A rigorous reward structure with BOTH positive reinforcements and negative consequences needs to be in place regarding both goals and budgets to support this approach. It also requires a senior leadership team that understands that some leaders will succeed and be rewarded, and others may not be rewarded and will need to gain more experience, but that the overall business will benefit.