FP&A Stories - ⏳ 4 ways to get an honest budget from your business partners
Hello Reader 👋Last week I delivered my usual "Finance for non-finance" course for one of my clients. It's a day I really enjoy, because I get to hear what the business thinks about us when their own finance team isn't listening. 😄 Everything went smoothly until we arrived at the budget chapter: the usual negativity came, but this time with something stronger behind it. "We never get what we ask for," said one manager, and another added that it's normal to spend the full budget, otherwise they're sure they will never get back to the level they had before. I have to be frank with you: I had no good counterargument on the spot. They were describing a game that we, in finance, helped to design. So this week, we're talking about sandbagging in the budget, why our business partners do it and how to get an honest number from them. So take a coffee, sit down and read FP&A Stories just like 16k other readers ⏳ 4 ways to get an honest budget from your business partnersWhat sandbagging looks like in real lifeSandbagging is voluntarily loading costs or being extremely prudent with commercial targets.
And then comes December, when every cost centre suddenly needs new laptops, a team event and a consultant. Two economists measured this on US federal procurement, where budgets expire at year end: spending in the last week of the fiscal year was 4.9 times higher than the weekly average of the rest of the year, and the IT projects launched at year end received clearly lower quality ratings.* Some dare to call that "smart spending" but let's be honest, they're far from smart. *Liebman, J. & Mahoney, N., "Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement", American Economic Review, 2017. Why I would do the same in their shoesLet's try to sit in their seat for a minute. You ask for 100 because you need 100, and the budget round ends with everyone cut by 10%. Next year you ask for 115. That's simple arithmetic, and we taught it to them. If you spend 90 out of 100, congratulations, your baseline for next year is 90. This is exactly what the manager in my course meant with "we'll never get back to the level we had before". Giving money back is punished, so nobody gives it back. Add the bonus on top. In most companies, missing the budget by 2% leads to a negative review, while beating it by 2% leads to a "well done" and a higher target. Michael Jensen wrote years ago in Harvard Business Review that budgets used as targets pay people to lie, and humanly, I can't blame them. What it costs the companySo if it's rational, where is the problem? The first cost is the money itself. Every $/€ sleeping in a cost centre is money that a project with a real business case didn't receive. Management knows the game, so the answer is a flat haircut on everybody. The manager who submitted an honest number gets cut like the others and learns the lesson for next year. In two budget cycles, you have trained the whole company to sandbag. Some departments end up with a reputation: their stretch is decided before they have even presented their submission, and whatever arguments they bring that day, nobody really listens. The year they come with a real need, they pay for five years of buffers (and that happened to me when said department suffered from a hard competition). And our own work suffers. A favourable variance of 8% against a sandbagged budget mostly measures how well someone negotiated in October. 4 ways to get an honest number without being a jerkWe own a big part of this process, which means we can change the rules and we should. Try one of the following ways in your coming budget and tell me if they worked: 1️⃣ Start with the top-down envelope I took this position years ago and I still hold it. When the general ambition is known before the bottom-up starts, the final target is clear fast and everybody sees upfront how much space there is for buffers. The bottom-up will still be well done, and people stop negotiating against an unknown number. 2️⃣ Ask for assumptions before amounts A single figure is easy to cheat on, and three drivers are much harder. Ask how many hires, from which month and at which cost, then ask for a low, an expected and a high case. My favourite question is "which line would you cut first if you had to give back 10%?", because the answer shows you where the buffer sits and they are the ones who chose it. While you're there, look at the phasing. A cost line spread over twelve identical months, or a budget full of round numbers, usually means nobody built it from real plans. 3️⃣ Bring the history to the table Take three years of budget versus actual per department and go and see your internal clients with it before the submission. A department that lands 7% under budget every single year has a pattern. It's much kinder to look at it together in September than to let the CFO apply a silent stretch in November. I call that the "budget fear factor" (but don't use it with your business partners, it wasn't well received when I used it 😁) 4️⃣ Make giving money back safe Agree with your CFO on a central contingency pool, so that risks which may or may not happen are funded once at company level and the ten cost centres can drop their own. Then get a commitment that an underspend isn't automatically removed from next year's baseline. The same study gives a nice proof. The one federal agency allowed to roll over its unused IT funds showed no year-end spike and no drop in quality for that spending.* The first manager who returns budget in October and gets it back the year after will do more for your process than any budget guideline. Final Thought Sandbagging is a rational answer to the rules we set. If people hide money from finance, our process taught them to. Every buffer you remove by force comes back next year in a better hiding place. The ones you remove through trust tend to stay away. Hit reply and tell me about the most creative buffer you ever found in a budget (or hid yourself, I won't tell anyone). I read every message and reply to all of them. 🎥 5 Slides that your ExCo wants to see every monthIf you haven't done so yet, you can still watch the video I posted last week on YouTube about the only 5 slides a CFO needs from us. Have a look if you have the time. On top of that, every view supports the growth of my tiny little rikiki YouTube channel 😄 That's a wrap for this week See you next week! P.S. After 17 years in FP&A, Consulting and Leadership, I’ve coached and trained finance teams across industries, from consulting and manufacturing to tech, media, and global logistics. If you want to sharpen your own storytelling skills or bring this work into your team, here are a 3 ways can work together:
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