What is Truly Discretionary?
When most companies put together a budget, there is discussion of so-called discretionary items. That, of course, implies that some things are not discretionary. Yet the reality is that for a business designed to be profitable little is truly discretionary. Perhaps the means change, but the intent of the investments remain.
We’ve all seen in a downturn that training, travel, and headcount are whacked, yet are those truly discretionary? Why was investing in those attributes considered wise before the slide, but viewed as unnecessary during declining sales? Is not the concept of eliminating sales personnel during a sales slump theatre of the absurd?
The answer is usually around “what we can afford,” which indicates a business not designed for profitability. Those manufacturers hope for and expect profitability and cannot withstand even short stretches without it. They invest more on cash position than on needs of the future of the company. Revenue minus cost as a positive number is certainly required over time for any business. So are wise investments in all aspects of growing the capabilities of the organization.
Prudent improvements are not cyclical. Any interruption to them reduces the competitive position of the organization.
If one of your employees has an innovative idea that could be very valuable, do you say “no” because there’s no budget for it? What if an employee sees a great opportunity to learn a new skill or enhance current ones, but doesn’t follow through on it because there’s no training budget? And yet leadership is disappointed by the business culture that is neither learning nor innovative?
A manufacturing business must make decisions regarding building capacity and building capabilities, which in turn builds capacity. We commonly demand a payback period calculation on equipment, add space because it’s obvious, and add people because we see no alternative. Yet how often do we review the capital justification requests to learn from where we were wrong or right? Rarely, if at all. If we make the wrong decision in adding staff, we just eliminate them.
No business makes a good decision each time, but the odds are improved with mission and core values that truly mean something; Specifically, that mean more than maximizing today’s profits.
If the words trust, respect and honor are to have meaning in your business, how can we consider discretionary the decisions that make those real? Yes, by all means, challenge the means we use for training to ensure multiple options are considered. That can build in creativity, innovation, and a longer-term view of what employee development really involves. But why only in a down year?
The same for travel; does seeing improve understanding and relationships? For those manufacturers who espouse “go to gemba” as the best way to learn and improve, why would we preclude that in working with customers, suppliers, or investors?
You don’t have to spend everything during a good year, nor reduce spending in a bad one.
The responsibility of leadership is to understand what is fundamental to building an enduring business that will eventually accomplish its mission while living in concert with its core values. A business focused on maximizing today is sacrificing tomorrow.
I encourage you to invest some time in thinking. Not just reacting and deciding, but contemplating. What are the basic aspects of your business that will enable it to move towards its mission over the next decade? How will you ensure continual investment in those regardless of market swings or cost changes? Do we really have discretionary items in our budgets?
As you begin to address these questions, you begin to design your business for profitability. That is a critical first step in making yours an enduring business.