Recently, an executive coach was advising a CEO I work with on building teamwork in his company, and encouraged him to do “ra-ra” type activities (group outings, that kind of thing).
That’s meaningless. While it’s always nice to get people together for a bit of fun, the real way to build teams is to get people working together on actual business problems.
Team-based budgeting is the method I have used for many years to perform the budget process and build teamwork, and it makes a lot more sense than what is often done.
In most companies, budgets are done by each manager turning in a budget to the CFO, the CFO puts it together for the CEO, the CEO cuts out expenses and adds additional revenue, and poof! – the budget is presented to the board.
Not really a workable process.
This brings me to the subject of team-based budgeting.
I’ll start with a story: Many years ago, I started as the president of a software company and found several things wrong with the accounting and finance functions:
– No one had responsibility for a budget.
– The VP of Sales was in a heated deadlock on commissions.
– Forecasting was done on a hope and a prayer.
At the time, the company was small — about $15 million in revenue — and so, at that size, it had largely been run on a sort of “financial dictatorship” by the major investor. Well, considering that this shareholder was dealing with a management team that didn’t really understand finance, his point of view was understandable.
However, it’s important to develop a team-oriented approach to forecasting and budgeting. By implementing this approach, I rapidly had the whole senior management team working together smoothly on the finance functions. Better yet, we were able to grow very fast, to nearly $50 million in revenue, without any outside capital. Because we responsibly controlled costs, as a team, we were able to do great things, without a lot of money.
But it really wasn’t that hard. All I did was:
– Rework the financials to make them clear and understandable.
– Make the managers responsible and accountable for their budgets.
– Implement team budgeting
Reworking the financials
Of the three financial statements required to run a business (P&L/income statement, cash flow and the balance sheet), the one that managers must have a good grasp of is the P&L. The other two can be worried over by the CEO and the CFO.
And there we run into a problem: GAAP accounting, which can muddy the scene. Revenue recognition, accruals, depreciation and amortization can make it like a company is bleeding money hand over fist, but when you really look into it, it’s actually doing just fine. Or, a company can look wildly profitable, but is a toxic mess (anyone ever heard of the old Computer Associates?). Reading a modern financial statement, especially for a software company, is a bit of an art in itself.
So first I pivoted the focus onto billings as the topline focus. Billings is what sales guys go for, what they see “on the board”. They closed a deal, and it was for $100k. That’s what they see, and that’s what motivates them, and that’s what you want them to get.
There are fine nuances to get into here, that aren’t worth cluttering up this article with. It’s different in a SaaS environment (where you typically compensate on MRR/ARR and make that your target), and yes, there are cases where you may not compensate on billings. But the bigger point is, get a number that’s real to the sales people, that they can go fight for.
So the first thing I got everyone around was the concept of one topline number. And it was the billings number. This was in direct contradiction to what the CFO had been doing earlier (bizarrely, paying commissions on recognized revenue).
Now to the expenses: there are expenses that managers have control over, and ones they don’t. They go out and buy something for $10,000, it’s $10,000. It’s not some amount amortized over a period of time.
I wanted the managers to know that if they bought something, it didn’t matter how we would book it from an accounting perspective: they bought it. Business live on cash flow, and the impact of cash decisions is vitally important for managers to understand.
So I went a step further, creating a “modified EBITDA”. Basically, I turned the P&L into a cash-based accounting system (we still maintained a separate set of standard GAAP financials for the board, investors and other external parties).
To create my modified EBITDA, I simply added back in certain capital expenditures to my EBITDA figure to get an income statement that reflected actual cash spend, making it easier for everyone to understand.
And then I got them all in room and we budgeted as a team.
Now, depending on your business, you can probably ignore the other pieces of advice here, but this last one is important.
The way you do team based budgeting is to you set the goals in advance of the meeting — a realistic target. Like: “20% operating income, 25% increase in sales.”, and so on.
You then give all the managers enough time to pull their numbers together. Each has a departmental spreadsheet for their own area.
For the sales forecasting side, I would work between the product teams and the sales teams to get our product launch dates figured out, new versions, etc. I would take the teams off-site and we would work through the product planning. (Product planning is a huge driver for revenue, and something to spend quite a bit of time on).
And then I got all of the management team in the same room. We sat with a large-screen projector, and our spreadsheet was built with links where I would have all of their files loaded at the same time. Then, we would go through every manager’s area, and they would have to account for their expenses. As we made changes to each department’s budget, the main P&L forecast was automatically updated, giving a very quick view of the impact of each little change.
Now, peer pressure is a powerful motivator. We’re all on the same team, so when the sales person says “I can’t get sales without more leads”, the marketing person is right there to answer him, and the CEO is right there to work with the team.
When I first loaded that spreadsheet, it was comical, as a first-pass budget always is. Everything was in the red, because sales people sandbag and managers ask for more money than they need. But after a marathon two or three-hour session, we started to get to reality.
The CEO is driving the process. But the CEO is letting the team work on the heavy lifting of figuring out where to get the money.
I’ve literally been in a situation where I said “not enough money for a Christmas party”. R&D and sales then began to horse-trade expenses back and forth to get the money for the Christmas party. We got our Christmas party. (I really doubt I would have killed the party, but it was the idea that counted — that we had to work out a way to cut more costs so that we could earn the luxuries.)
After one marathon session, managers are given homework, to go back and figure out ways to get the costs worked down more (or get the sales up). Department heads have individual break-out sessions with other department heads to work on the budget. And then we have another team meeting a week later.
After that, the budget is pretty much a wrap.
Getting to the target number becomes a game. And when you have a game where everyone works together, you have a team.
Key is that the managers own their budget. They are given leeway to execute on their plan, although I still had in place basic cost controls to ensure that costs were still being managed.
Pushing responsibility down into the organization is the way that company’s succeed. And team-based budgeting is the first step to correctly delegating and managing authority.