Last week we talked about budgeting in a growing company. I defined that as a company between 50 and 100 employees. Today we are going to wrap up the budgeting series by talking about what happens to the process when you get to be a “big company.” The context for the whole of this MBA Mondays series of posts is the world of entrepreneurial startups so “big company” means 150 employees or more to me. The biggest companies that I actively work with are between 150 employees and 1000 employees. Once they get bigger than that, they are beyond my ability to comprehend them and help them.
The process of budgeting in a large company doesn’t differ that much from a growing company. If you haven’t read that post, please go back and read it.
The budgeting process is still led by the financial leader of the company (VP Finance or CFO but by this stage you are likely to have a CFO) and the CEO. But the team that runs the budgeting process now includes the entire senior team. That is because each senior team member has control over a meaningful team and piece of the business. So you have to get them all involved in the budgeting process.
It’s also increasingly likely that your revenues are coming from a number of lines of business so you will want to do a more detailed revenue forecast with attention to each segment of revenue. Your sales leader will still be responsible for the revenue forecast, but he or she will need help from the finance leader and often from other senior team members to put the revenue forecast together.
You will continue to use KPIs as a bridge between the revenue budget and the cost budget, but the creation of the KPIs and the forecast of them is now driven by the entire senior team. As I said in last week’s post, this is the most important part of the budgeting process so make sure to give the senior team ample time to get the KPIs right.
Cost budgeting in a large company is a much more exhaustive process. The cost budget has a lot more detail and input into it. It is an iterative process where each senior team member brings a cost budget from his or her team and the finance leader integrates it all together and then negotiates with the senior team members to get the numbers where they need to be. This is where entrepreneurial budgeting starts to feel like big company budgeting.
One thing that many companies start doing at this stage is benchmarking their budget numbers versus others in their industry sector. This is mostly done with public company numbers since getting detailed financials on privately held companies is difficult. It is helpful to look at what your competitors or similar companies are spending as a percent of revenues on the various parts of the business. And it is helpful to look at how profitable their businesses are versus yours.
As you can see, the primary difference between the budgeting process in a growing company and a large company is the amount of involvement, interaction, and iteration among the senior team. This all takes time. So start the budgeting process by labor day, if not a bit sooner. It will take three months to do this right. You’ll want your budget ready for a board review in mid to late November so there is time to do one more iteration before year end if that is necessary.
The budgeting process is really critical in a large company. It forces the company to make highly informed decisions about investments and resource allocation and it creates company wide discipline around hitting goals. I have never seen a company of 150 employees or more operate functionally without a strong budget process.
I’d like to again thank Matt Blumberg and Jack Sinclair of our portfolio company Return Path for their help with these budgeting posts. I have watched them go through all of the various stages over the years and their planning and budgeting has been stellar. Their insights were invaluable to me in putting the “how to” parts of these posts together.
Next week we’ll talk about what happens when the reality starts diverging from the budget – forecasting.
As someone who’s done a lot of strat planning and initiative development in large companies, I’d add that this is where the growth initiatives need to get funded.
Here is where the rubber hits the road on your commitment to doing things ‘new’.
This either happens within existing departments, or across departments. The right way to do it needs to be figured out. And measurement of their success may or may not be easily done via the existing financial system. (usually not).
My experience is that the biggest opportunities in the large companies cross departmental lines; they’re opportunities in large part because they are not easily addressable via the existing structure.
Need to make sure the Finance folks understand this. They probably need to have someone who’s clear on the strategy as part of their team so these important initiatives don’t get forgotten during the internal budget negotiation process.
Many fabulous initiatives get de-neutered during budgeting.
Budgeting IMHO is usually organizational kryptonite, which often serves as dead battery, sucking the life out of flexibility and “organization” (taking the organic out of organization) and one might as well call it mechanization. There are means of not becoming a budget robot, the type that take last years budget and add a little extra to it in a whirlwind of last minute panic and meeting forecast mandates. It requires us to see the longer term consequence of what makes budgeting wasteful and inflexible.
Budgeting is not a stand-alone process, it involves every fabric and fiber of the organization and done right, it leads to positive behaviors and intelligent business. Done wrong and the next time the sales force engage in “sandbagging” or the Veep is trying to find ways of spending “surplus” (which strangely she or he will otherwise need to “justify”) or someone whose actions exceed expectations but who know is in no man’s land because the game clock ran out on her or him – then we can figure out that budgeting can be fundamentally improved.
When budgeting is done right it changes the business conversation and positively effects the business process. We wake up to the fact that budgeting is awakening oneself up to the business rather than a chore or a thing that “has to be done”, that it involves strenuous thinking and heavy-duty front end planning rather than become the bookend for unintended consequences and that it is not caste in stone and that quarterly rolling forecasts bring insight, contingency and adaption to changing market needs.
Then budgeting is more than just a financial outcome, it is seeing where financial outcomes have replaced operational realities, it seeing where operational realities have replaced customer needs and it is seeing where customer needs have replaced bad business or that entity which is just blood-sucking, life-eating terrible choice of a customer. Traditional budgeting should be married to bad customers, they have a lot in common.
If budgeting is more than it seems then one can begin to see associations that assist it. One association is hoshin kanri or strategy deployment. I love the catchball principle involved in it, that instead of creating a self-defeating paradigm or designed political problem, collaboration takes the form of inquiring needs that serve to energize imagination and collective response. We can therefore find these more flexible ways of budgeting that lead to dynamic outcomes rather than functional ones.
I am no expert in budgeting, indeed as budgeting goes, I thoroughly hate the process as it is traditionally done, but there is a smarter way of thinking about budgeting. In part I write this to noddle my own head rather than give sustenance to others – budgeting isn’t the domain of easy answers, cookie cutters and time-bound expediency. It is a relationship and that relationship has a superpower. The one thing I personally don’t want budgeting ever to be is to become organizational kryptonite. I guess then the way I view budgeting in large organizations is as a form of “empowering budgeting”.
This article was originally written by Fred Wilson on May 31, 2010 here.