Whereas the year-end is the accountant’s most stressful time of the year, the budgeting season is the financier’s most stressful time of the year. It is during this several weeks to several months period each year that all eyes at any company or institution turn inward on the finance office for a sneak peek into how the future year is going to look for the entity. Often times, the conversations that the budgeting team has with the various departments and divisions throughout the entity provide valuable insight to the leaders of those areas as to how well the entity is performing in the current fiscal year – naturally, the future budget factors into account the current state of the entity along with anticipated projections.
While it is not directly the heroics or fault of the budgeting team that the amount of a future budget provided is better or worse than expected, the finance office and budget team can alleviate anticipated negative reactions through transparency in the budgeting process, communication early and often, and by taking a division oriented collaborative approach to developing the budget.
There are usually two opposing mainstream approaches to the budget-building process: the build-up budget and the top-down budget. Inherent in the names, each approach begins at the polar opposite of the alternatives. The build-up budget is created by looking at the smallest elements of the entity and coming to a final budgeted expense number based on the actual expectations from each department or divisions manager. This is normally used in times of growth when profitability is not in question. However, the danger that comes with this method is managers may use the opportunity to be the driving source of input as a chance to inflate their budget needs. An entity needs to have a good leadership transparency strategy to ensure all across the board, all levels of employees understand the goals and mission driving the direction of the entity. Leadership will also need to have a high level of trust in the intentions and competence of their management level team. If these elements are not verified, an entity could end up in a mode of excessively spending much more than what is needed to operate at maximum effectiveness.
"While it is not directly the heroics or fault of the budgeting team that the amount of a future budget provided is better or worse than expected, the finance office and budget team can alleviate anticipated negative reactions through transparency in the budgeting process"
Alternatively, the top-down budget has increasingly become the majorly used budgeting methodology, as cost-cutting and efficiency takes priority in a densely competitive market throughout all industries. This paradigm dictates leadership developing their target number for available funding of expenses for the upcoming year, and providing it downward to management, who will be tasked with operating within those parameters to accomplish their annual and strategic objectives and goals. One of the main benefits to this type of approach is that company boards and leadership can maintain strong control over the spending habits of the entity, and they can set the dollar values that will be needed in planning for strategic initiatives, rather than working with unknowns. Since entity leadership is the best-enabled team to integrate and incorporate all elements of the entity with the strategy and goals of that entity, it makes sense that they are the ones who set the budget that they want the company to follow. A major danger that exists with this method, however, is that since the leadership team is not involved directly with the day to day activities and routines of the entity, without seeing what goes in to making the entity work at the ground level, they’ll be unable to effectively understand how funding is required for operations.
Ideally, a semi-blended approach should be sought when possible. While it is not likely to be able to, especially at large entities, entrust all management level employees with being able to honorably build their own budgets or know the overall strategic direction of the entity, it is important that they are involved with the budgeting process. Similarly, while it is not likely that all leadership members have experience at the ground level to a point where they recently know the day to day operations expectations from the lowest points at the entity, the more in-touch that leadership is with the low-level managers and employees, the better equipped they’ll be to make budget funding decisions.
A critical function of the finance department’s budget team is to act as the liaison between the various operational departments and the leadership finance group, to provide the connection between what is needed for operational efficiency and effectiveness in alignment with senior leadership goals. It is important that the vision of the entity is transparent and well-supported by all areas of the entity so that the entire entity can cohesively work together to accomplish goals in a unified manner. While a blended budget approach is not a novel concept, effective communication between leadership and management is often an element of the process that is lacking or not focused on enough. Company leaders must be transparent if they are to get the most out of their managers and receive the results they desire.
In the end, budgeting can be made very simple as long as simple and sensible reasoning is followed. The more cooperative and collaborative that leadership can make the various management areas of the entity, the more success the budget team will have in finding the ideal budget number that is: in accordance with entity goals and strategic initiatives, enabling of an efficient environment, providing of the proper resources to operate at maximum effectiveness, and not at the cost of cutting any corners that may later on hinder the growth and success of the entity.