I realize that the question isn’t one you stop and think about during the heat of the budget battle. There are templates to be created, links that need to be validated, formulas to be edited. And that’s just preparation! All of that work represents just a fraction of the time spent developing, reviewing and reworking budgets.
So before all that heats up again in the upcoming budget cycle, let’s take a breath… and answer the question “is your budget process fair?” And while we’re at it, let’s examine the business implications of what’s riding on your answer.
A budget process is fair if it meets the following conditions:
- Budget Holders feel heard. They had a chance to make their case.
- Budget cuts (if needed) are made surgically. That means specific programs, projects, events, initiatives are eliminated or reduced.
- The strategy and goals of the company are what matters – not politics or who shouts the loudest.
- At the end of the process, there is consensus that the right business decisions were made, all things considered.
On the flip side, unfair budget processes share these characteristics:
- Budget cuts are made with a chainsaw across the board (i.e., “take all travel down by 10%”).
- Changes are made by finance staff to line manager’s budgets. This might be done for expediency, but it undermines trust. It also undermines comprehension of what’s in the budget and what’s not (and why).
- Locked down spreadsheets. They prevent user error – but they also prevent users from budgeting the way they would if their hands were not tied.
- Budget approvals are influenced more by politics than by strategy.
- At the end of the process, there is no real buy-in to the numbers from people outside of Finance.
Why does fairness matter?
As a newly minted MBA, I thought that if people were told what their budget was, then that was the end of the story. That was all the “buy-in” that anyone would ever need. Right? Well, for those of you who have been around a while, I can hear you laughing. Yes, I was young and naïve (what they don’t teach you in business school!). I had to to see for myself that without buy-in and understanding of the numbers, without a sense of ownership and accountability by the front line managers who need to deliver the results – the budget was not worth the paper it was printed on.
The plan – and the actual execution of that plan – are two different things.
In order to have effective execution people need to know the plan and the budget that supports it. More importantly, they need to have confidence in the plan itself, and confidence that they have the right resources allocated in the budget to execute the plan. Those are cornerstones for commitment. Without those cornerstones, the organization won’t be fully committed, and the plan won’t be executed.
The business impact of a budgeting process that is believed to be unfair isn’t just that morale suffers. It’s that the business suffers from poor execution of a plan people really don’t buy into.
Bottom line? There’s a lot at stake in asking “is our budget process fair” and even more at stake in what you do about it if the answer is “no”.