Business-process consultants have long noted that when line managers have a hand in planning — as they do at Constar — budgets get better. That appears to be especially true when managers actually key their own numbers into the system. Respondents to the CFO/Buttonwood survey reported that when budget holders don’t type in their own numbers, more than 40 percent of submitted budgets have errors and omissions; when budget holders do their own inputting, the error rate falls to 28 percent.
At first glance, this result is surprising; common wisdom holds that nonfinance managers are more likely to make mistakes. But Lawrence Serven, a principal with Buttonwood, argues that this finding merely illustrates the perils of failing to engage line executives in budgeting. “We in finance have always thought about formula errors,” acknowledges Serven. “But when [corporate] is interpreting the needs of operations, there are errors stemming from miscommunication and misunderstanding.”
Hence, when a manager asks finance to raise his travel budget by 5 percent, finance may add 5 percent to the transportation general-ledger account, but neglect the meal or hotel accounts.
That, on a larger scale, is what can happen to budgets when finance or senior management drives the process. Because corporate doesn’t understand local issues as well as line managers, even well-intentioned efforts to create budgets on their behalf are likely to be a poor reflection of reality. “When the business-unit CFO is the only one working on the plan, it’s going to be a bad budget,” says Joseph M. Leone, CFO of consumer- and commercial-finance company CIT Group.
And, of course, it’s especially true when senior management unilaterally adjusts line managers’ numbers to suit the corporate mandate.
Why is it so hard to build a bridge between finance and operations? Much of the problem lies with differing points of view. Finance managers look at longer-term (typically annual) goals. By necessity, line items in the corporate budget are broad, since they aggregate costs and revenues across disparate businesses. Business managers, by contrast, focus on actually carrying out their strategies. Their plans are typically short-term, specific to the business, and project-oriented.
“As an author of a budget, I don’t think in the same terms as accounting people,” says Joe Puglisi, chief information officer of EMCOR Group, a specialty construction and facilities-management company. “I think about project-oriented costs and benefits, because that’s how you determine your return on investment.”
But since finance needs numbers that fit neatly into general-ledger categories, department heads often have to look across individual projects, breaking out what items get charged to the general-ledger code for transportation, what goes into the office-supplies category, and the like. It’s slow and unrewarding work.
One solution: rejigger the budgeting process to make it more intuitive to line managers while still providing the big-picture data that finance needs. Best Buy is starting to do this. The retailer spent four years overhauling its approach to planning. Previously, corporate officers made broad assumptions about the needs and capabilities of the company’s stores — and budgeted accordingly. Now, senior management gets that information directly from those in the trenches. An important part of this, says Nitchals, was designing operational metrics that make sense to the business operators but also have an impact on corporate results. “We in finance act as a mediator, translating the results of their metrics into financials,” she says.