For most of us, the annual budget process is about to kick off.
Budgets. Love ‘em or hate ‘em? If you are an Operations Executive born after 1922, you've probably run into a budget or two during your career. I certainly have over the past 30 years. In fact, it was during my time in corporate America, after a few budget cycles, that I coined the phrase, "The Elaborate Budget Dance".
Have you done the Elaborate Budget Dance before? It’s a combination of the Tango and the awkward middle school slow dance. Yikes!
Before I get into the dance moves, let’s look at the origins of business budgeting. You can read the article, https://www.datarails.com/then-and-now-business-budgets/ to learn more about its history.
1760: England – The Chancellor of the Exchequer developed a national budget each fiscal year as a check against the king's power to tax and control spending by public officials.
1837: England passes the Reform Act making the budget official.
1911: US President Taft lobbied the government for a budget.
1914: General Motors CFO, Donaldson Brown, created the first business budget to determine the return on investment from a relationship of factors including working capital, cost of sales, materials and more.
1922: J.O. McKinsey publishes "Budgetary Control" suggesting that the past is gone and only the future can be controlled. (Yes, the same McKinsey who went on to be the founder of the famous consulting agency.)
1987: Excel – probably still the single most used budgeting tool. (Guilty!)
2008 – Current: Waves of dissent have come and passed, yet the business budget still exists.
Some will argue that the business budget is a relic of the past and should be avoided at all costs. Others will argue that it helps align the organization on certain business goals, and if kept real-time, will provide invaluable guide rails for financial performance.
What does my experience show? Mixed results! For the record, almost all of my budget experience comes from the lens of manufacturing and service-related businesses. It’s where I learned my dance moves. Ha!
So, what is The Elaborate Budget Dance?
For me, it is a mash-up of research, analysis, projections, educated guesses, strong personalities and frustration. Here goes:
Step 1: Department Preparation
Department heads (including yourself) prepare individual budgets by reviewing projected sales revenues, then painstakingly calculate labor, material (if applicable) and other costs. You also build a Big Project employee wish list for special projects. And yes, this will most likely involve Excel (or Google Sheets and Slack for the hipper folks.)
(We’re not quite dancing yet, but we do feel pretty good about the exhaustive work of our analysis and the thoughtfulness of our employees’ Big Project wish list….)
Step 2: Submit your budget proposal
Like Ralphie dreaming about submitting his beautifully crafted story on the virtues of a Red Rider BB gun from the movie, A Christmas Story…you too await your A++++++ grade.
Step 3: Rejection #1
Ugh. Your budget submission gets rejected and the evil twin superpowers of the CEO & CFO ask for a 15% across-the-board cut to everyone's budget. And…due by the end of the week.
(Now we’re starting to dance! We’ll call it a Tango.)
Step 4: Redo #1
Not a problem. You’ve built a little fluff in the numbers to account for “uncertainty”, so you reach out to your managers for a little cost trimming and - viola - you reduce your budget by 17%. Overachiever. This will certainly gain you accolades from the evil-twin superpowers! So you resubmit your budget with a day to spare.
Step 5: Rejection #2
No explanation. Everyone is required to cut another 10%. And yes, you guessed it, that’s on top of the extra 2% you found in Redo #1.
(The music is starting to slow down.)
Step 6: Redo #2
You go back to your managers and ask for another 10%. Of course, they aren't thrilled but they get to work. Some of the Big Projects are the first to go. You dutifully resubmit a reduced budget.
Step 7: Rejection #3
Yep. Again. No explanation, although you are beginning to think that Sales has exaggerated its revenue numbers and is now lowering its sales targets.
Step 8: The Middle School Dance
You remember the awkward tension in the room during your first middle school dance, right? Everyone split along two opposing walls, nobody speaking…that’s the phase we’re in now. The original budget deadline has long passed. Nobody’s talking. Even questions to the CEO go unanswered.
We’re slow dancing now...
Step 9: The Budget Hand Down
After a long, slow dance of silence, you receive an email with your new budget number. It has no resemblance to your original submission. All your amazing analysis is gone. Several of your Big Projects are marked approved, while others are left blank. What happened?
Step 10: The Moonwalk
The final step in our Elaborate Budget Dance is the moonwalk. Made famous by Michael Jackson, you now have the task of taking one for the team by going back to your staff and explaining not only how the new budget works but its wonderful benefits. There’s a fair amount of walking back expectations and rallying your troops around a new set of numbers.
Do these ten steps resemble your budget dance moves?
Maybe you have a better process. Maybe, like some, you no longer prepare an annual budget and have transitioned to rolling forecasts. Certainly, being in the middle of a VUCA (Volatility, Uncertainty, Complexity, Ambiguity) environment begs for different approaches to a static annual budgeting process.
Ways to streamline your budgeting process:
1. Build your Big Project lists at the corporate level instead of developing competing departmental projects. Involve stakeholders across the company to align the key, strategic-level projects that will drive the most organizational value.
2. Develop better Sales forecasting methods that involve operations such as the S&OP (Sales and Operations Planning) or IBP (Integrated Business Planning.) Bottom line, Sales and Operations need to work together to cut out some of the budget dance moves.
3. Give Operations a seat at the board table. Operations often has little exposure to their corporate board and thus tends to suffer during the budgeting process. If there is no voice representing Operations within the larger strategic deliberations, the entire organization is potentially sub-optimized.
4. Communicate. Much of the frustration surrounding budgeting is the lack of upfront and continual communication during the process. Setting realistic expectations at the beginning can ground managers and staff on financial realities and stave off future frustration. Plus, less moonwalking afterward!
5. Innovate. Each company has unique processes, performance expectations, culture and more. Allow for innovation within your budgeting process. Be open to new techniques such as Agile, OKRs and IBP. Work with all stakeholders to create a budgeting process that improves over time. Track your improvements as you go.
There are many more ways to improve your budgeting process. These are just a few.
How do you streamline your process? Do you have unneeded dance moves? Are you tracking the performance of your process?
I would love to hear your comments.