VideoThe budgeting process begins with the company's salespeople, who forecast demand based on what they hear from customers. The projection then goes to the operational planners, who work up a production scheme to meet the forecast. That planning involves employees right down to the factory-line schedulers, who give feedback on manufacturing capacity and job scheduling. Eventually, the production and sales plans go to each plant's accountants, who work out the costs involved. "They tell us things we don't know about how the customers take their bottles: labeled or unlabeled, whether they pick up or we deliver, and what type of pallets they prefer," says Kaplan. "The idea is to take information from the person who really knows it best."
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.
Term Limits
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.
The metrics for Best Buy's call centers illustrate the approach. Finance employees conducted extensive interviews with the managers and business analysts who oversee the customer-service operation. Finance managers determined that it wasn't enough to merely measure the costs of running a call center. They decided that Best Buy should track the factors that affect those costs. These are numbers that are already familiar to call-center managers, things like the time that operators spend on the phone with customers or whether calls come from users of the company's Website or customers who shop in its stores. The measures give an early indication of the costs the call centers will incur and are more useful for managers hoping to achieve their budgeted targets.
Managers and analysts enter the data directly into the company's budgeting system, where it can be converted into financial measures that are used in the budget. "This is really activity-based costing," says vice president of finance Gordon, "with an eye toward predictive ability."
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