By: Cherry Birch On: October 8, 2019

For those of you working for companies with June year ends, hopefully your budget was set and approved before the start of this financial year. For others you may be in budget planning mode. This series of blogs is designed to help you have more confidence in budget management,  an area which is usually a vital part of every manager’s role.

In Part 1, I addressed the whole budgeting process and gave some guidance on budget setting. In this part I cover more of the budget setting process and some of the budget games we play!

Top Down or Bottom Up?

Another other aspect of budget setting is whether your organisation uses a top down or bottom up approach. Bottom Up is where the budget setting process starts at say the Business Unit/Department level. Typically as a manager of an area, you may be asked to assemble your budget –as described in Part 1. You will be the person who can best estimate what can be realistically achieved and what resources you need to deliver the required outcomes. Your budget is submitted, via your manager, to the Finance area who prepare a master budget for the entire organisation. Top Down is the process where, say the Executive, or maybe the parent company, determine the overall budget required to meet the Strategic Objectives and instruct the various business units as to what they are required to deliver.

A good budget needs input from both Top Down and Bottom Up. However the order of the process and the communication associated with the process are often where problems arise. Business Unit/Department managers would be justifiably aggrieved if they spent a large amount of time assembling a budget without any guidance or input from a strategic perspective, with the result that their budget is completely rejected. Similarly if the Top Down approach was used without any consultation or involvement of the Business Unit managers, then it is highly unlikely that they would feel any ownership of what they would see as an imposed budget.

Budget Games

No this does not involve the finance team running the 400 metres! What I am referring to is what unfortunately happens all too often – or so I have heard – during this budget setting process.

So let’s imagine a company where the divisional managers are asked to assemble their budgets and send them, after approval by their managers, to the Finance team. They then prepare the overall aggregate by totalling up all the divisional budgets – let’s call the final profit number $X. Meanwhile the Executive Leadership Team (ELT) have had their Strategic Planning offsite and have agreed on $Y as the required result for the year.

Guess what? $X does not come close to $Y. Now given these 2 numbers are supposed to agree, which number do you think is required to change? Well I will give you a clue – it is not the number agreed by the ELT!! So what happens next? All those divisional budgets get changed and are sent back down to the managers, often – unfortunately – without any accompanying communication by way of explanation. How can I politely describe the reaction of the divisional managers when they see their revised budgets?

This photo probably says it all!! Of course, there is likely to be a complete lack of ownership of the budget as a result of this approach.

So when do the Budget Games begin?

Well of course as the saying goes – Once bitten, twice shy. So what happens next year when the budget setting process starts again? Our divisional managers know that their budget is going to be knocked back, so they decide to add a bit of ‘padding’ to their original bottom up budget! (Other terms for this might be contingency planning or maybe ‘adding the fudge factor’!) This is of course to ensure that when their budgets are then cut back, they get what they wanted in the first place!

I reflect on all the wasted time and energy in these games and yet I am reliably informed it still happens. Maybe even in your organisation? If only there was more constructive communication, then these games might not be viewed as necessary.

Communication is absolutely vital to strong financial management. So that original divisional budget should be supported by detailed assumptions and justifications. It is more likely to be approved if it is. Similarly those Strategic Objectives should be shared and explained, so everyone understands the big picture and how they in their area can contribute. Add to this a healthy discussion over priorities by all stakeholders and the resulting budget has a greater chance of success.

In Part 3, I will look at communicating with the team and reporting on the actual results – often referred to as variance reporting.

I hope this proves helpful in assisting you with the budgeting process. Do drop me a line and give me some feedback. Love to hear your comments – email me at cherry@financialtrainingaustralia.com.