How to cut budgets fairly?

[gfbotha]

Feeling a bit revolted right now… How do other companies handle budgeting cycles, or more specific, cutting them down to the required size? Here is how it works here:

Prepare budget, get/estimate costs, and load on ERP system. Even submit motivations for any significant increases. Some guys budget in an honest way, others build in more fat.

Financial manager find the percentage increase too high compared to last year.

Shotgun approach kicks in: all department heads are requested to cut the budget in such a way that each individual department complies with the guideline percentage or allowable rise. Important clue: This has to be done within say, two days with the result that budgets of sections & departments cannot easily be assessed/compared on individual merit. And, forgotten are those particular motivations.

Thy will cut…, and all will cut equally. The latter is the problem. You might say that after having pointed out the consequences of any particular cut, one should be able to make peace with it all, but ultimately, it is not the person forcing the cut who has to make things work later on…!

Why bother and waste energy on this; take the old budget and multiply with the guideline factor!

 

[zdas04]

You are not the first person frustrated by this, just the first to post the frustration here this year. Budgets are never fair, right, or proper. People play games. People who don't play the games don't get any money and learn to play the games. People who don't learn don't get any money again and have to find a new job. It sucks.

Many companies do do a multiplier times operating budgets and it works as well as any other technique for a lot less effort.

The rub comes in with capital budgets. Most projects can't be cut 15% since you don't want to start a project that doesn't have enough money to finish it. The best process I ever saw was that every project developed a standard indicator (such as NPV(10)) and when the projects are more money than the adjusted budget you fund the "mandatory" projects first, then projects with the highest NPV(10), down to the end of the money. What always happens is that the project on the cusp is bigger than usual and when you delete a million dollar NPV(10) project and the $800k project under it won't fit either so you skip it and fund a $300k project and the other two project teams are pissed. Budgeting sucks. The more financial types are involved, the more it sucks.

David

 

[gfbotha]

Hmmm…, appreciate your message David! Just after completing the therapeutic action of typing mine, the thought actually crossed my mind that maybe this is just reality (I mean this is not my first budget); seldom will any budget ever be correct, fair or proper. Partially due to limited time & info available, in some cases lack of sufficient understanding, politics, or even prevailing wrong perceptions.

Actually I am a technical specialist type of guy who mostly works with facts whilst aspiring for the truth in stuff, but I do have some line responsibility as well. Therefore I really find it difficult in adopting the “games” aspect of it all…

I think your closing statement about the financial types is extremely relevant!

Regards