Making Sense of Corporate Budgets

"This is what you got!" is the common phrase heard after budgets are approved. Along with the immediate complaints that "I did not get enough!" or the frustrated expressions of "Good luck getting anything done with that!" managers across the country roll their eyes in disbelief about the results of the annual budget exercise.?

And, for good measure. Time and time again excessive financial acrobatics and scrutiny of operating data exacerbate this tradition of "asking yet not receiving." In this 9-minute edition of Budgets, Simplified we'll walk you through key mindsets that will allow you to understand how budgets are drawn and why they are spent accordingly..?

Mindset #1 - You are NOT owed anything. Despite two popular schools of thought around the budgeting process, it is, in its nature, a top-down approach. Most companies have to turn in a profit, thereby requiring diligent cost allocations. While a bottoms-up exercise informs the executive team "how to portion" the money decisions around key investment areas or cost controls ultimately decide who gets a larger piece of the pie.?

For Managers: Embracing this reality puts you in a frame of mind that is ready to accept any outcomes of this process. It is key, then, to have enough levers up your sleeve, that will allow you to do the most with your allocation. Divisions that require large people investments should invest in lower-cost-countries, extending the value of their dollar many-fold. Be mindful, though, that appropriate support infrastructure must exist to fully realize that investment. Going to India, for example, is a legitimate cost-reduction approach but, without proper local management support, productivity goals may be jeopardized.

For Individual Contributors: Trust that extensive deliberations were used to determine where company funds will be spent. Talk to your manager. Ask them what the new year’s investment areas are. Chances are high that goals for the coming year are supported by those who got the highest allocations.?

Mindset #2 - Own it by knowing it. It is healthy to involve your managers during the run-up to the budget submission. Traditionally done by consolidating line items into a "budget wish list" organizations internally vet out and prioritize budget "asks".?

For Managers: A good budget owner knows the ins-and-outs of their budget, able to justify each entry, confidently. Budgets must tie clearly to the organization's goals and objectives for the coming year. Acting as "enablers of progress," when deployed properly, additional dollars can be used to hire talent to increase delivery capacity or procure a new productivity-improving tool. Knowing what the return-on-investment (ROI) period of each budget request is gives your CFO the approval confidence needed.

For Individual Contributors: Make it a point to clearly articulate your needs up the management chain. Spend time during your 1x1s to present ideas in the form of business cases. Constructive efforts like these equip your managers with information they can use to request for funding.?

Mindset #3 - Budgets are not linear. It is amateur to think that budgets are a "pot of gold" doled out by a benevolent leprechaun.?And, that you get to keep it for your own consumption. Junior managers think that there is a set amount that can be spent at a predictable pace through the fiscal year, without regard for the dynamic market and operating conditions that impact the financial balance of the company.

For Managers: Use "Systems Thinking" instead when making adjustments. A budget is an informed financial decision based on the best information available at a point in time. By nature of this exercise a budget is invalid the minute it is called "final". Combined with various operating levers, like lower operating cost regions, alternative suppliers, or execution timing, budgets can be adjusted to temporarily control spending while waiting for a large deal to close, or accelerated, in order to capitalize on gains realization earlier.??

For Individual Contributors: Understand that managing a corporation is a complex undertaking, with dozens of parameters and circumstances in play. The basics are clear, though, companies need cash and have to turn a profit. Controlling costs and garnering returns from investments are ways to ensure fiscal health.?

Mindset #4 - Focus on improvement. The popular investment adage "Working on your flaws gets you to parity while working on your strengths gets you to growth" best describes this mindset. Budget allocations, no matter how larger or small, should be directed towards efforts that grow your operation and enable it to scale. Maintaining status quo, while a valid budget spend, is tantamount to "investing" in a depreciable commodity.

For Managers: Given twelve months to spend $100,000 you can chose to hire three developers in a low cost country and build six automation scripts that can save your team hours of manual work, increasing profitability and morale. Boost this investment, though, by structuring a risk-reward deliverables-based statement-of-work (SOW) with an outsourcing partner, where you only pay when the benefits are realized.?

For Individual Contributors: Ask your manager for areas you can contribute to the growth of the company, above your daily tasks. This way you are part of the solution, rather than just a by-stander. If you know of improvements that can save the company money and open up learning opportunities, bring them forward.?

Mindset #5 - Invest like it's your own. Managers are fiduciaries of their companies, required to act on the financial well-being of the corporation. This is an often-forgotten aspect of the budget exercise. Already compromised by the anti-thesis of Mindset #1 dispassionate managers "just spend the money", likely as they or their predecessors have been doing.?

For Managers: Answering the question "How can I get the most mileage from this budget?" will spur ideas that you and your team can then prioritize based on risk and reward. Will implementing a new work management system differentiate you from the competition? Would renegotiating existing vendor contracts yield more gains and less risk? Are you capitalizing on infrastructure investments in a new region? These are but a few questions that provoke you to make the most out of your allocation.

For Individual Contributors: Savings or gains from proper deployment result is healthier coffers that likely will make it back to you, in forms more than just salary. Better training opportunities, added company perks, and fancier office get-togethers are some ways healthy financial sheets manifest itself.?

Unless you've gone through some finance courses in college the budgeting process is often learned, the hard way. We are hopeful that the insights shared above give you, regardless of your role or position within a company, a more objective rendition of what goes behind the scenes and inside the minds of those who manage our finances and inspire you to think about this annual undertaking in better light.?

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