The Budgeting Game – 101

The Budgeting Game – 101

The almighty Jack Welch once said “The budget is the bane of corporate America. It never should have existed. A budget is this: If you make it, you generally get a pat on the back and a few bucks. If you miss it, you get a stick in the eye–or worse.” – Link

Amongst many scary nightmares like Y2K, Robots taking over the world, Haley’s comet; the Budget is the only annually recurring one. Most of us are faced with the sometimes-inhumane task of budgeting. Several managers try to put away this as a secondary task until the eleventh hour. However every mature manager realizes that; Budget procrastination would mean having to take and also accept tough decisions, in the end.

Let us review some budget & account-related terms that most of us use interchangeably. It looks like they have similar meanings; sadly they don’t.

Here is a quick primer on the classic-basics:

• Planning is a very high-level strategic estimation expected of business performance. In most IT organizations, planning is the responsibility of senior management. This is because they have better view of things from the top and understand critical factors like changing market conditions and opportunities. Also since planning is closely tied to the company’s long term corporate strategy and vision.

Availability of accurate historic data is extremely critical to perform effective planning. Bill Gates, former CEO of Microsoft Corporation, says “Anyone who has participated in a budget review with the executive committee at Microsoft knows that we insist on having accurate numbers and insightful analysis of those numbers. Numbers give you the factual basis for the directions in which you take your products.” – Business@The Speed of Thought

This process should be done on fixed annual intervals.

• Budgeting is planning at a granular level and addresses individual business areas/verticals. It is an item-by-item list of horror. Hence a greater audience is involved in this activity as great amount on details need to be addressed. Budgeting takes much longer, often weeks & months. It is difficult to perform a budgeting exercise more than twice a year.

Those of us who have seen financially challenging and global recession-like scenarios will know that; an entire budgeting exercise may be out-of-date or invalidated as soon as it’s approved. Therefore the effort involved in budgeting is inversely proportional to the company’s financially stability and the global markets.

 

• Forecasting is essentially the process of performing multiple iterations of re-checking and re-correcting the budget — to reflect changing market conditions, strategic plan alterations, error corrections and revised assumptions in the original approved budget.

Most IT Companies are heavily dependent on the forecasts.  Re-forecasting generally occurs monthly, ad hoc or on an event basis. This is mainly due to factors like the ever increasing competition, rescheduling of project activities, changes in taxation, political changes, acts of God etc … Forecasting is generally carried out finance personnel alongside sales and other revenue centers.

Budgeting Effort Graph

Participants of the game

Based on the structure of every organization; budgeting impacts people, process and technology across all levels. Budgeting is quiet unpopular with most managers, as they consider the entire activity as a protracted and recurring blame-game – for outcomes that are very difficult to manage & control. A very (lucky) few members of the organization are excused from the pain of budgeting.

• Stake / Budget Holders are generally the heads of departments/verticals, P&L centers Product(s) or Revenue segments. In some companies, they may also include some CxO’s & directors. They are directly responsible for revenue generation or need to support internal revenue functions (directly or indirectly).
• Senior Managers are either immediate / direct reports of the aforementioned stakeholders or those who heads divisions within a vertical. They are generally the senior most people in the middle rungs of the company.
• The Finance Department is directly responsible for the assimilation, processing and collation of the end-deliverable of the exercise – The Budget.
• IT Department is often a cost-center; depending upon the nature of business of the organization. IT is an essential business driver and the department is expected to provide ‘miraculous solutions’ to impossible problems. The IT spend of a company plays a key role in the budget.

Pain of the participants

• Stake / Budget Holders are probably the MOST affected during a budgeting exercise. They probably know from past experience that this budget game can put them on a podium of embarrassment. One must keep in mind that a transparent budgeting process can easily turn into a competition among peers. This can often turn out to be negative and could develop in to a race to attain unachievable targets, leading to unnecessary pressure on the lower rungs. In such a scenario, the one who most successfully masks his incorrect estimations, inefficiencies and the gaps in planning – is the clear winner!

Apart from the politics and the negativity; Budget Holders must be prepared to predict the unpredictable & also produce strange financial information for to support and justify their budget. Budget Holders are often pressured by the board or shareholders into making unrealistic modifications to their forecasts and expectations.

• Senior Managers have similar emotions about budgeting. The senior managers are most concerned about their on-the-ground responsibilities and the newer initiatives that they have planned. They always remain concerned about sustaining their day-to-day operations in the event of a budget slash. If they have experienced this in the past, they become more paranoid tend to produce incorrect estimations, over budget, keep unnecessary buffers, and under-forecast revenue.

• The Finance Department becomes the hub of all the action during the budgeting phase of the year. They have the unfortunate and time-killing task of tracking the ever changing budget versions and re-doing the entire budget cycles. Finance staff must also work long hours as the intensity increases towards the end of the cycle amid struggles to incorporate unplanned & last minute changes and respond to recurring analysis reports (from the top) as the budget is finalized.

They also struggle with the automated budgeting systems and data entry proforma, chasing other managers for their budget reports and forecasts & painfully complex tax calculations amongst other things.

• We will deal with the IT departments budgeting challenges separately.