In recent corporate history, executives or change agents have frequently used the phrase: “Insanity is doing the same thing over and over again and expecting different results.” This hyperbolic call is to challenge the norms so as to innovate or deploy corrective action to otherwise improve. While there may be an unsaid groan from seasoned, salty veterans who anticipate a new TPS  report, process, or measurement tool, being satisfied with the status quo delivers mediocre results.
Dollars-to-donuts, most business owners and key stakeholders who are in the throes of planning or budgeting cycles are thinking: “Now that 2020 is behind us, what does our business look like in 2021?” Every fiscal year gives a business a clean slate where the possibility of growth and profitability abound… 2021 more significant than any other year in my lifetime. Through the finance function, constructing an effective operating plan with aligned revenue targets and budgets can unlock and enable financial success. As CFO, the burden of financial planning requires the broad charter of ‘owner’ and ‘leader,’ but great CFOs also challenge complacency in a quest to drive shareholder wealth.
As an opener, every organization has a different way to develop a financial objective and then cascade the details into a tracking method. A plan or budget becomes a target for an individual or group (department) with a varied time horizon. Each method requires some layer of time and thought to set the course for the future operates of the organization. Ultimately, the method is subject to leadership’s historical preference as well as the corporate culture or existing practices.
Each approach and technique have pros and cons when evaluated in a vacuum. In the broadest sense, companies will often establish a top-down objective which provides the team with a strategic direction. “Grow revenue by X% to yield Y% margins.” In some respects, this type of marching order delegates of authority to those who live and breathe the business. Those stewards (business unit leaders, product line managers, department owners) have objectives to achieve a financial objective and it is incumbent upon them as to how they operationally solve.
However, the executive view may be directionally correct, but may omit critical facts entering/exiting a planning period that prove to be unattainable or simply not sequenced with investment, cash flow or the market. Thus, a bottoms-up approach can provide real substance that builds targets based on the existing facts. Signed contracts (existing revenue streams), headcount-related expenditures, and facility expense become predictable line items to project and form a foundation for a department’s individual budget. As well, the longer a business has been in existence, history and trends give rise to a predictive behavior or pattern. ‘Rolling forecasts’ are also used to compliment a budget cycle, deploying an ongoing projection process that gives Management continuous visibility and opportunity to make decisions to improve the financials of the future.
In any event, one major pitfall, exemplified in larger or governmental organizations is that line items in a budget are assumed ‘status quo’ for the simple reason that money was spent last year. Rather, if my division spent $50,000 on professional fees this year, an assumption is often that I will spend $50,000 next year. In addition, savvy managers that do know their business well can ‘put a thumb on the scale’ when establishing inputs to a budget to create a buffer and/or lower the bar for performance to attain bonuses.
An episode of ‘The Office’ illustrates this well. Oscar (the accountant) explains to Michael (manager) that they have a budget surplus. Michael must spend $4,300 by the end of the day or else the Scranton Branch loses that amount in the budget for the next year. A debate ensues about where to deploy this ‘found’ money. The climax of the episode culminates in Michael simply not spending any of the surplus. The result – A management bonus!
One budgeting technique that can used to deter waste is a zero-based budgeting technique. As the name suggests, all of the expenses start at zero. Budgets then are justified, not by history, but based on the need to generate income and what it takes to run the business. By nature, the output generates a lean operating model when compared to other budgeting techniques that layer on existing spend as gospel and even tack on growth. Zero-based budgeting results in a focused execution strategy with lowered operating expenses.
Zero-based budgets do have some shortfalls. The time it takes to reconstruct each expense, requiring a deep dive into the operations of the business is significant. Coordinating across people and functions to agree can be labor-intensive, but also highly political as individuals compete for the justification of resources. As well, zero-based budgeting can often be slanted towards a short-term objective as opposed to long-term planning objectives.
The clear pitfall of the zero-based budgeting approach is letting perfect getting in the way of good. Rather, how much time am I willing to construct the perfect operating model versus actually growing the business? What I love about the zero-based budgeting approach is that the core tenant challenges the status quo by its very nature. Organizations lose sight of this as personal bias enters the forum, influenced by sentiment or relationship. The not-so-inconsequential question is: “Is this expenditure necessary for operations or is it a sacred cow?”
The reality is that any budgeting and related analysis takes time. Even in a relatively small company, columns of data require a discipline to apply a financial savvy with knowing the underlying business. Marrying the existing run rate of expense to enable the growth of a company is not for the weak of heart. Moreover, as a point of principle, having senior executives invest time in spreadsheets or modeling tools is poor, if not negative, return on investment.
Various practices can be implemented to challenge wasteful spending or, by contrast, under-funding no matter what planning methodology you subscribe. One key element common to any successful plan is having a trust finance business partner. Experienced finance professionals develop methods to identify projected gaps or oversights, such as year-over-year fluctuation, trend and ratio analysis, and other data manipulation that can uncover areas that can be trimmed or that need added investment. A good finance professional becomes data-driven to find correlation or data segmentation that offers insights and a logical process to construct a firm projection of the company’s financials. Great finance professionals intimately understand the business and its stakeholders, challenging existing levels of spend, exacting an inquisitive nature to chart a course for execution with risk mitigation tactics built-in for long-term success.
In summary, whether $1M or $1B or somewhere in-between, a strategic CFO can create enormous value by working shoulder-to-shoulder with a CEO or owner(s) to execute a vision. Optimizing shareholder wealth should be a mantra that is repeated before, during and after any planning cycle. Thus, let the hunt for sacred cows begin! TPS is a reference to a mundane or tedious report that has little to no worth.  Sacred Cow – An idiom that considers an idea, something, or someone as beyond questioning or criticism. In context, an expenditure that is untouchable regardless of business operations. A practical “sacred cow” example: A company having dire cash flow issues refuses to suspend free, Friday employee lunches as it is viewed as part of their corporate culture. (News flash, if you go out of business, there is no culture… much less free lunch!)
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