If you are a finance professional leading a budget exercise, chances are the bottom-up round submitted by your business lines won’t consolidate to the desired results. With your board meeting looming, this is not the time to panic. Don’t throw in the towel or cough up any small cushion that you managed to squirrel away. This is the time to negotiate.
While you might feel you own the problem, don’t. It isn’t the CFO’s budget; it is the leadership team’s budget. The CFO, FP&A leader, or controller is the referee of the process. In an earlier article, I talked about the importance of agreeing on a top-down budget early in the process -- https://www.stantonblackwell.com/post/it-s-july-time-to-start-budgeting. If you followed that advice, you are in a good place even though it may not feel like it. While business lines forcefully contend they have squeezed out every last dollar of profit, the numbers still aren’t where they need to be. But the executive team already agreed on the consolidated results that they want to achieve in the following year, and you are simply providing a status on the plan to reach those mutually agreed upon goals. Below are the steps we recommend you take to get your budget across the finish line. And as you move forward, remember the cardinal rule of financial planning - always be viewed as credible and fair.
Step 1 - Do your analysis on where the results look good and where the team needs to sharpen the pencil. Share this information broadly, be transparent, and bring others along. This will build trust and make the shortfall a shared problem. With a greater understanding of the details, business line leaders will cooperate. And, armed with the facts, they will likely use peer pressure on the least ambitious leaders so that you aren’t always the bad guy. That helps.
Step 2 – Make your first conversation with each business independently, with just the key players. This is the time to listen objectively and assume positive intent. Learn as much as you can about the challenges, investments, and key assumptions. This educational process is critical because ultimately, your job is to spread the pain around equally. Right now, listen and make a list of all the places where you see opportunity. Don’t negotiate yet. Here are a few examples of things to keep in mind during these conversations:
1. Obvious sandbagging should be called out, with good humor, as an immediate opportunity.
2. Inflation has caused labor and material costs to rise. Make sure that instead of year-over-year cost variances, you do a productivity calculation that includes a unit volume. In other words, costs can increase while cost per unit declines. This will ensure fairness across the organization.
3. Consider timing. Is it even possible to hire new sales staff at the pace reflected in the numbers? If a large investment is assumed, ask about the purchase or kickoff date. Often these dates are overly optimistic. Pushing an investment out just a few months might help.
4. Focus on accelerating investment payback. When does the budget show that a new product turns a profit? What is the assumed payback period for a new salesperson? Ask this question, “what would it take to accelerate that assumption?”
5. Pay close attention to strategic alignment and cross-functional dependencies. Are the budgeted investments aligned with the strategic plan? Is it assumed that a certain technology investment will be made to achieve the budget? If so, make sure that the investment is also reflected in the tech budget. And, make sure that all strategic investments are prioritized and sequenced properly. My partner recently published an article about investment prioritization that might be helpful -- https://www.stantonblackwell.com/post/initiative-prioritization. At the end of the meeting, review the list of opportunities and ask the team to go back and think them through. Typically, these meetings generate some results but not enough.
Step 3 - Now is the time to have a closed-door meeting with the most senior leaders and their CFOs. Make sure the CEO is fully prepped with your unemotional and objective analysis. Present the current budget rollup compared to the top-down agreement and the draft of your final deck that will be shared with the board. No one wants to look bad in front of the board. You should also include the list of the open opportunities you’ve collected so that leaders see what the others might contribute. This is a good time to remind the group that the business is ultimately measured as a whole - net income, earnings per share, or lives saved. The leadership team’s compensation is typically tied to this metric so they will get the message and the horse trading will begin.
Step 4 - Very often, after this difficult conversation there is still a nugget needed to finalize the budget. Spreading the final shortfall around the organization like peanut butter should be a last resort. Eventually, you will run out of daylight and may have no better option. Just remember, be credible and fair in the process.
Two final suggestions that might help wrap things up. The business lines often want concrete recognition of how challenging it will be to achieve the budgeted results. Keep a risks and opportunities log. The simple act of documenting that the sales target for a new product is aggressive is often enough to move the conversation along. Conversely, the opportunities log will serve as a reminder of potential actions to be taken when things don’t go according to plan. If the new product is delayed? Slow hiring. Last, keep a top-of-the-house cushion but be transparent about it. Make it clear in the consolidation presented to the senior team how much cushion you’ve retained. A budget cushion isn’t a sneaky CYA move for the CFO. It is simply a rainy-day fund because let’s face it, stuff happens. Zero cushion is suicidal but don’t overdo it. Remember, credible and fair.
When a budget is finally complete and everyone on the leadership team is equally frustrated, wondering how the heck they are going to pull it off – you have achieved success. It never feels like a victory and only one thing is certain – the following year will bring surprises that make your budget less useful or, useless. Remember Covid? So, enjoy this fleeting moment when you have the leadership team aligned on a path to success, and take your staff out to thank them for their hard work.