Last year, Kronos gathered all of its managers for a meeting to talk about goals and discuss the company’s strategic direction, part of an effort to lay the groundwork for a more meaningful budgeting process. Such a tone at the top “sets the right expectations for people,” says DiPietro, and signals a shift from the check-the-box exercise budgeting has often been.
Caldwell tries to act as a facilitator in the process, using an “interview style” in which she asks sales executives and business-unit heads where they see growth coming from in the year ahead. “We don’t say, ‘You need to grow X%,’” she says. “It’s a combination of a bottoms-up and top-down approach. We meet somewhere in the middle.” The finance team provides detailed customer and product data from the prior year as a starting point for the discussion.
The CFO and her fellow finance staffers also question the sales staff about their expectations and challenge the usual assumptions as they push for realistic numbers rather than hopeful guesses or sandbagged estimates. “If someone says, ‘I’m going to grow my numbers by X%,’ I want to know which specific customers, which specific product lines, are providing that growth,” says Caldwell.
If sales managers’ initial growth estimates aren’t high enough to reach the company’s overall goals, Caldwell and the rest of the management team dig in deeper to identify less-obvious opportunities for new or expanded business. “We’ll sit back as a team and say, ‘OK, what other strategies can we employ to grow this business?’” she says. But, she notes, the final numbers ultimately belong to the sales team.
To give herself and the company’s board and investors a level of comfort, Caldwell reviews the budget and identifies areas where budgeted numbers may be a stretch, but also finds spots where she can see upside beyond what’s budgeted. “My goal is to have a budget with some risk, but also some opportunity,” she says.
Once the budget has been agreed upon and revised, Caldwell also regularly revisits the plan. Last year, she reforecast three times. She’s already started her second round of forecasting for 2010.
The Quest for Better Data
In an attempt to better understand the impact of macroeconomic trends on their business and improve their ability to plan, finance executives at Houghton Mifflin Harcourt decided last year to cast a wider net to include not only more people, but also more data in their budgeting process. As the nearly 200-year-old conglomerate struggled to determine the impact of the recession on its venerable textbook-publishing business, “We realized that our current tools weren’t what we needed to help us understand how bad it could get,” says Hazel Hughes, senior vice president of finance and business control at the company’s K-12 division.