Budgeting: Grass Roots or Top Down?

By Dennis Sullivan
Chief Executive Officer

We’re at the time of year when many of you are in the middle of management’s biggest nightmare: preparing the budget! Where do we start? Let me give you my view of “The Budget.”

First, there’s a myriad of approaches to budgeting, but most fall into one of two categories. There’s the kind where you are given a percentage increase or decrease from last year to work with. The second is where you’re asked to build your budget from the ground up given the best available business forecasts. In either event, I like to subscribe to the approach where we take the opportunity to look at each segment of our operation and critically review performance, new enhancements from last year and projected improvement for this year. This lets front-line managers fully engage in a self assessment of how work is done, where they’re improving and where they need support. It’s not quite zero-based budgeting, but it does require us to challenge ourselves about each part of the operation.

Once we make those adjustments, we apply our current metrics, take next year’s forecast and develop our budget. This approach makes two assumptions: you have metrics, and you have a method of forecasting. If neither exists, put them on the schedule to develop before next year. I like the grass-roots approach because it challenges front-line managers to assess their current business tools: metrics, methods, procedures and forecasts. You may only have one or two of these tools, but each year you will be reminded of the need to have all four.  It also gives senior managers an opportunity to begin building the case for resource-needs in a systematic way with “facts and figures.” If there’s a resource cap (budgets can’t exceed two percent or must remain flat), then it forces managers to look for improvement opportunities. It pushes managers to more effectively drive performance evaluations, and it requires them to think about how they are getting work done. It forces creativity! It forces collaboration between support areas. It forces TEAMWORK!

A top-down directive of budget limits can initiate many of the same actions, but too often it’s handled further up the organizational-responsibility ladder, and less evaluation and analysis is required. If my budget has to remain flat, the easy answer is to leave everything the same, except for minor changes to account for modest salary increases. I’m not saying it has to be this way. I’m saying this is what I see happen.  The biggest risk is that your top management asks for a grass-roots approach and then comes back and says you are 20 percent over finance’s budget requirement. It’s like they knew the answer, but wanted to see if you could come up with the same one by doing an in-depth, build-from-the-ground-up, budget process. This kind of approach does no good. People get frustrated, lose confidence in the senior group and begin saying, “Just TELL me what the number is, and I’ll adjust this year’s budget to meet the needs.”

The grass-roots process is so critical for three reasons: 1) it forces managers and supervisors to begin working regularly with metrics and forecasts; 2) it stimulates creative solutions to complex problems. (Supervisors start asking themselves questions like, “Is it a process issue, a technology issue or a people issue?”); and 3) it begins to engage middle managers in process and technology solutions instead of transaction-productivity solutions. It begins to force managers to think about the business, not just the people they manage or how many transactions they can do in an hour.

What is your approach to budgeting?  What are your challenges?   How does your company creatively engage managers in the budgeting process?  This can be the most interactive management process you engage in, and the most productive.