Your enterprise has a choice: budgeting can either be viewed as part of the solution to subpar performance or as part of the problem. Either way, it is a self-fulfilling attitude.
“I don’t have time for budgeting, I have a business to run!” This self-contradictory statement may sound illogical on its face but it actually says a lot about why department heads resist submitting budgets. Rather than a valued business tool, they see budgets as extra work that is disruptive, complicated, and potentially perilous — sort of like taxes. As a result, budgets often arrive late; their numbers are unreliable; and decision-making is often seat-of-the-pants because priorities and assumptions are left unclear and not widely communicated. As people scramble and performance suffers, there is even less time and tolerance for budgeting “busy work.” And the cycle continues.
The way to stop a vicious cycle like this is with a virtuous one. People will get on board with budgets only when they actually experience the payoffs of a good budgeting process. Nagging them, without rewarding them, won’t work. Some of those payoffs are:
- Faster decision-making. Fundamentally, a budget tells you how much money you can spend. Obviously, if you do not know that in advance then you must stop and figure it out whenever you make a spending decision, which takes time.
- Agreed upon policies, priorities, and assumptions. Ultimately, for people to know where to spend resources, they must agree on business drivers. A budget forces them to agree so that individual actions will align with a common goal.
- Greater control. Once established, a budget is a reference point with which to evaluate real-time decisions and also to reevaluate any premise or goal on which the current budget is based. That way, the organization stays on course and only changes course as warranted by a new premise or a new goal.
The problem with getting budget process buy-in is not that department heads favor slow decision-making, dislike clarity around business drivers, or prefer out-of-control spending. They obviously don’t. The problem is the budget process itself — how it is done and the tools used to do it. The solution is one that supports department-centric budgeting with tools robust enough to support both departments’ and management’s diverse needs.
Department heads need to experience budgeting’s three payoffs for themselves — not vicariously through finance. So if, for example, this is the marketing department’s budget, the payoffs must be relevant to marketing. In other words, what are marketing’s goals? What are the marketing-specific policies, priorities, and assumptions that matter? The same questions apply to all the other departments as well — engineering, IT, manufacturing, logistics, human resources, sales, or whatever.
A department’s budget must therefore employ that department’s language and reflect how that department works. Different departments have different names for items; they have different ways of apportioning value; some might have a service based delivery model, some more asset based, and some (like IT) might be transitioning from asset-based to service-based. Different departments and different business units also might naturally gravitate to different budgeting models — zero based, historical based, or rolling. Furthermore, different departments may need to comply with different industry standards or regulations. And finally, no departments exist as autonomous islands within the enterprise, so inter-department transfers must also be identified and budgeted for — so that a change in one department’s line item updates dependent line items in other departments — and so on.
With department-centric budgeting in place, department heads will naturally want to use it — not because finance is nagging them — but because every time they do use it they receive the payoffs of faster decision-making, more clarity around business drivers, and greater control of their business. Of course, finance and senior management also see payoffs. Budgeting is more continuous; numbers are more accurate; and intended strategic outcomes are more assured.
Don't Forget the Tools
Supporting department-centric budgeting requires the right EPM system. On the one hand, it must be flexible enough to provide the budgeting features and data views (like those listed above) most helpful in each department. On the other hand, it must also provide a single version of the truth and a unified view for the enterprise. On a macro level it must also enforce the data dependencies across departments; enforce consistent enterprise-wide policies, including budgetary roles and reporting timelines, and enable strategic alignment across the various departments with the organization as a whole. Individual departments and senior management will also need the ability to model how various what/if scenarios impact their respective budgets.
Given the right EPM system and the right process, the tension between making a budget and running a business disappears. Doing either of these tasks will automatically mean doing the other. It should not be a choice.