Budget 2018. How Best
companies get Board Approval

Sales are growing 5% in ’17. They were flat in ’16 and declined -3% in ’15. What do we Budget for 2018?

Budget 2018. What Best-in-class companies do

 

I worked half of my career at headquarters and a half running local finance organizations. This  resonates with me:

 

"Conventional budgeting is an exercise in corporate gaming “because everyone is negotiating for the lowest [target]”, while pressure to “hit the budget numbers” means that no trick is off limits.

 

Jack Welch @ Financial Times                     See also the quote from W. Edwards Deming

 

Board Approval

Imagine a business that is growing 7% in 2017.  The District Manager, Country Manager, Regional Manager and CEO are worried that it will not continue in 2018. Each lowers the budgeted growth by 1% and present to the Board a growth of 3% for 2018The budget is rejected and the entire process needs to be redone. Sales must be least 5% (2% higher) the Board says.

 

Now imagine a business where sales are dropping -3% in 2017.  The District Manager believes next year will be different and budgets for a growth of +3% in ‘18. Everyone else is not sure, but they are worried about budgeting another year of declines. They reduce the growth slightly, by 1%, and present to the Board a budgeted growth of 2%. The budget is rejected.  The Board is worried that if sales are not met (again) the stock will crash. The most they will take is a “flat budget”. Sales must be at most flat, the Board says.

Best-in-class Budget Process

A few years ago, a few Global Controllers and CFOs met to discuss what we could do better. Our firms had hired sophisticated (expensive) consulting firms to help us do that, but we learned the most from each other. The group included global multinationals which were the first to report to Wall Street.

 

The best firms had shorter budget periods and used their resources to “sell more units, at a higher price, which were produced at a lower cost”. Their main advantage was in Process (50%), Tools (20%) and People (30%) (see link for details).

A real-life example

As Global Controller, I had to ask Country managers to “increase/decrease sales by 2%” as in the example above many times. Some were at ease with it; they would call their Controllers and resend the numbers the same day. Others, I could see in their faces, felt it would take weeks. They would need to speak to their teams and identify which SKU to which customer could be modified.

Was the difference in the Process, Tool People?

A better formula for Sales Growth

 

Growth=   Price increases + market growth + market share gains

 

Lets’ go back to our example.

The business where sales are dropping -3% in 2017, will isolate the effect of market contractions and then openly show the market share losses. This will be followed by one slide with proposed actions by key customer and product.  The proposed actions may include price reductions, which will be debated and agreed upon at once. The meeting will involve stimulating intellectual discussions about how to “sell more units at a higher price which were produced at a lower cost” instead of number crunching. The Board will approve budgeted growth of 2%

The business that is growing 7% in '17, will show Nielsen data indicating that “the market” has exceptionally grown 5% instead of 1%,  as it has the last three years.

The Board will accept a growth of 3% and no further work will be needed.

Has it worked?

While we did look at and debated sales by product, market (over 180 countries) and customers, our focus was always on the “How” we were going to grow. As a result, our Budget was always approved by the Board the first time around.

Conclusion

A stimulating Budget process can accelerate sales growth.

The Budget process ends when it is approved by the Board. My team and I normally go out for lunch that day. I wish you all the best during Budget 2018, including being able to have that lunch sooner, rather than later.