Have you ever heard “That number doesn’t look right” when you’ve been in a budget review session with the CFO, or some other executive?
I have. I saw it at Pepsi (where I was a FP&A Manager) and I know what that moment is like.
Here are the reasons why that happens:
- Expectations. The executive reviewing the budget was expecting to see something different.
- Errors. Yes, they happen. The numbers don’t look right because there is an error somewhere. It could be a broken link, a bad formula, or simply a miskeyed number (it happens).
- Breakdown in communication. Somewhere along the food chain communication broke down.
Theses reasons are not mutually exclusive. In fact, they can be interrelated. For example, there might be a gap between executive expectations — and the numbers appearing in the budget (or forecast) — due to a breakdown in communication. Or executive expectations might be right, and they’re picking up errors in the budget.
What then are the consequences of “That number doesn’t look right”?
- Credibility is shaken. Doubt is cast on the Finance organization.
- The numbers can’t be trusted. Which means business decisions can be made with confidence.
- Rework and other inefficiencies. Finance needs to track down “why the numbers don’t look right” and either fix the problem, or communicate back up the line why the numbers appear off (but are actually legitimate).
So what’s needed to avoid hearing “That number doesn’t look right”? Someone could probably write a whole book on that topic, but in the short space allowed in a blog post, here are some fundamental suggestions:
- Define a baseline budget with high level Senior Management assumptions baked into it (e.g., Salary increase of 2%, no New Hires, discretionary spending flat against last year, 4% revenue growth, etc.).
- Issue that baseline budget to all budget holders. Make it clear what’s in there.
- Implement a policy that says any dollar request that goes outside the guidelines of the baseline budget MUST be justified. This justification could come in the form of written commentary, or by providing line item detail; or by identifying strategic initiatives, programs, events, projects or other type of action package.
- Focus the review sessions not on the baseline budget, but on the requests that go outside the guidelines. Comparing the Baseline Budget to the Requested Budget should highlight these variances; but the reporting must capture what we mentioned above — that justification can come in the form of written commentary, or by providing line item detail; or by identifying strategic initiatives, programs, events, projects or other type of action package.
- Have each level of management electronically sign off on the budgets beneath them. So by the time it reaches the most senior levels of the organization, there has been rigorous operational scrutiny of the budget. Note that because the sign offs have been documented, there is additional incentive to pay attention – nobody wants to face the question “How could you have signed off on that budget, what were you thinking?”
- If you study the requirements listed above, the theme of “communication” runs through them. In terms of a technology enabler, you need something that will foster effective communication throughout the process. While Excel is known for many things, it is not known to encourage or promote good communication.
- And it probably goes without saying, but you need a system that can guarantee 100% accuracy of the roll ups and reporting. This is almost impossible to do with Excel, human error always seems to creep in somewhere.
Again, there are more process changes and infrastructure changes that can be put in place to avoid hearing “That number doesn’t look right” but this is a start. If you have any suggestions you’d like to make, please add them here.