Budgeting In A Large Company
Last week we talked about budgeting in a growing company. I defined that as a company between 50 and 100 employees. Today we are going to wrap up the budgeting series by talking about what happens to the process when you get to be a "big company." The context for the whole of this MBA Mondays series of posts is the world of entrepreneurial startups so "big company" means 150 employees or more to me. The biggest companies that I actively work with are between 150 employees and 1000 employees. Once they get bigger than that, they are beyond my ability to comprehend them and help them.
The process of budgeting in a large company doesn't differ that much from a growing company. If you haven't read that post, please go back and read it.
The budgeting process is still led by the financial leader of the company (VP Finance or CFO but by this stage you are likely to have a CFO) and the CEO. But the team that runs the budgeting process now includes the entire senior team. That is because each senior team member has control over a meaningful team and piece of the business. So you have to get them all involved in the budgeting process.
It's also increasingly likely that your revenues are coming from a number of lines of business so you will want to do a more detailed revenue forecast with attention to each segment of revenue. Your sales leader will still be responsible for the revenue forecast, but he or she will need help from the finance leader and often from other senior team members to put the revenue forecast together.
You will continue to use KPIs as a bridge between the revenue budget and the cost budget, but the creation of the KPIs and the forecast of them is now driven by the entire senior team. As I said in last week's post, this is the most important part of the budgeting process so make sure to give the senior team ample time to get the KPIs right.
Cost budgeting in a large company is a much more exhaustive process. The cost budget has a lot more detail and input into it. It is an iterative process where each senior team member brings a cost budget from his or her team and the finance leader integrates it all together and then negotiates with the senior team members to get the numbers where they need to be. This is where entrepreneurial budgeting starts to feel like big company budgeting.
One thing that many companies start doing at this stage is benchmarking their budget numbers versus others in their industry sector. This is mostly done with public company numbers since getting detailed financials on privately held companies is difficult. It is helpful to look at what your competitors or similar companies are spending as a percent of revenues on the various parts of the business. And it is helpful to look at how profitable their businesses are versus yours.
As you can see, the primary difference between the budgeting process in a growing company and a large company is the amount of involvement, interaction, and iteration among the senior team. This all takes time. So start the budgeting process by labor day, if not a bit sooner. It will take three months to do this right. You'll want your budget ready for a board review in mid to late November so there is time to do one more iteration before year end if that is necessary.
The budgeting process is really critical in a large company. It forces the company to make highly informed decisions about investments and resource allocation and it creates company wide discipline around hitting goals. I have never seen a company of 150 employees or more operate functionally without a strong budget process.
I'd like to again thank Matt Blumberg and Jack Sinclair of our portfolio company Return Path for their help with these budgeting posts. I have watched them go through all of the various stages over the years and their planning and budgeting has been stellar. Their insights were invaluable to me in putting the "how to" parts of these posts together.
Next week we'll talk about what happens when the reality starts diverging from the budget – forecasting.
Having been involved in a few large company budgets, I would say the most important component of the process is communication. While financial skill and accounting knowledge cannot be discounted- you need to leverage that to improve the financial awareness of the team and to help stakeholders tell an effective story around how their decisions impact the company.P.S. This is one reason why I would contest including this post under MBA Mondays. 🙂 I am hoping the idea behind the categorization is not that you need to degree to communicate. Full disclaimer- I have that degree.
i get your point, but i think budgeting is a core discipline that should be taught in business school
Fred, it’s a great post. Naturally the big companies issues generate less discussion, maybe less interest, since they are less relevant **now**.But it’s great that you keep bring them, since one of your blog strengths is that it covers the full life cycle of a company. It’s a valuable perspective, usually rare. People tend to write about what is burning now.
The problem with budgets in big companies (at least in those I’ve had contact with) is that people start thinking about their “own budget” and keep hiding information from the budgeting team so they have an easier year.Sales people do it, but also all the others with the costs in their units. And then, if at the end of the year they haven’t needed that advantage they kept hidden, they use it in a suboptimal way to avoid losing it (“if I don’t spend all the budget for travel, next year they are gonna give me less, so I’ll travel even if it’s not esential”).
Hi FernandoInteresting as this is not my experience.In a large company, especially a public one, I liked having a budget process that drove communications across departments. It was my common ground to break down barriers with different groups, foreign offices and so forth.A good CFO will squash quickly the idea of ‘use it or loose it’ or hidden anything. Budgets are a great tool when used openly, a waste of time when the goal is to ‘game’ them.I guess I’ve always felt that overt accountability was the best idea even before the real time web made it unavoidable.
I was found an interesting paper from 2001 called “Corporate Budgeting is Broken. Lets Fix It” – http://papers.ssrn.com/sol3… This is an article by Michael Jensen. I could not find a recent article from Jensen about any outcomes. Did he/(they) “fix it” or was it was this just a clarion call to executives that there is something broken that needs fixing?[Em]
Thnx Viktor, I’ll check this out.
Fernando, what you have described here is the consequence of this “cartesian budgeting” (all head no body). Yet if we look at the body as well, it means go see where the work actually is being done. That is why I like Deming’s thinking [His 14 Points here: http://roadwarrior7.net/Doc… ] IMHO the first thing we budget is our own attention and how we engage our own roadwork (applied effort).[v.o.M.]
Fred–smack on that time and partnerships amongst senior staff is the drill here.Having run Marketing and M & A for companies of this size, it is no surprise that I have so many senior finance and sales execs as good friends;)3+ months timeframe for marketing and channels seems right. Rolling in acquisitions into a company of this size basically meant budgeting all year long.
i didn’t talk about how M&A impacts budgetingthat’s a really good topic arnold
“Once [companies] get bigger than [1000 employees], they are beyond my ability to comprehend them and help them.”I love this comment. On so many levels. If more of us, especially in the various branches of Wall Street, would finally acknowledge this, the capital markets would be a more efficient place and our economy would be more productive.
Budgeting IMHO is usually organizational kryptonite, which often serves as dead battery, sucking the life out of flexibility and “organization” (taking the organic out of organization) and one might as well call it mechanization. There are means of not becoming a budget robot, the type that take last years budget and add a little extra to it in a whirlwind of last minute panic and meeting forecast mandates. It requires us to see the longer term consequence of what makes budgeting wasteful and inflexible.Budgeting is not a stand-alone process, it involves every fabric and fiber of the organization and done right, it leads to positive behaviors and intelligent business. Done wrong and the next time the sales force engage in “sandbagging” or the Veep is trying to find ways of spending “surplus” (which strangely she or he will otherwise need to “justify”) or someone whose actions exceed expectations but who know is in no man’s land because the game clock ran out on her or him – then we can figure out that budgeting can be fundamentally improved.When budgeting is done right it changes the business conversation and positively effects the business process. We wake up to the fact that budgeting is awakening oneself up to the business rather than a chore or a thing that “has to be done”, that it involves strenuous thinking and heavy-duty front end planning rather than become the bookend for unintended consequences and that it is not caste in stone and that quarterly rolling forecasts bring insight, contingency and adaption to changing market needs.Then budgeting is more than just a financial outcome, it is seeing where financial outcomes have replaced operational realities, it seeing where operational realities have replaced customer needs and it is seeing where customer needs have replaced bad business or that entity which is just blood-sucking, life-eating terrible choice of a customer. Traditional budgeting should be married to bad customers, they have a lot in common.If budgeting is more than it seems then one can begin to see associations that assist it. One association is hoshin kanri or strategy deployment. I love the catchball principle involved in it, that instead of creating a self-defeating paradigm or designed political problem, collaboration takes the form of inquiring needs that serve to energize imagination and collective response. We can therefore find these more flexible ways of budgeting that lead to dynamic outcomes rather than functional ones.I am no expert in budgeting, indeed as budgeting goes, I thoroughly hate the process as it is traditionally done, but there is a smarter way of thinking about budgeting. In part I write this to noddle my own head rather than give sustenance to others – budgeting isn’t the domain of easy answers, cookie cutters and time-bound expediency. It is a relationship and that relationship has a superpower. The one thing I personally don’t want budgeting ever to be is to become organizational kryptonite. I guess then the way I view budgeting in large organizations is as a form of “empowering budgeting”.[Em]
wow, great commentit’s really a blog postyou should post it
I don’t personally view the world that way. I view comments as particular framework of thinking but it is not one that I have chosen to use. I am thinking out aloud and moving laterally as I do. The relationship I see is RECEIVING & GIVING and GIVING & RECEIVING. It is more a yin-yang relationship i.e. Here I am receiving thinking and I am giving thinking but in my private life it is about how I should give value and receive value.Disqus the way I have customized acts as a blog post [a.k.a.: http://www.disqus.com/emerigent/ ]. I personally prefer the idea of tribal diaspora which is to explore via the Disqus and Twitter space. AVC.COM therefore is one great village on my personal journey and so I don’t view what I express comments but an expression. On my prior visit to the “Emergent Fool” I was outlining to that blog owner (Alex) the idea of triangulation. Triangulation is taking the thinker (in this case Fred Wilson) aligning it with the observer (viz me) and the looking at it from a third viewpoint. The third point can be a personal challenge, a problem statement or a discovery lens. For me it simply represents a different form of learning, just as we can create a different form of budgeting. I look it it how my brain works not the group.In anycase as May 24th the one place I had pitched my tent on the web changed their service to a new platform and in so doing they wiped out nearly 10 months worth of my own “blog posts”. So I will now stick with Disqus to explore my thinking. Plus it is so easy to copy the entire Disqus thread to Microsoft Word so I will always have an instant backlog. So the summary of it, is receiving and giving is what I do online (thinking out aloud) and giving and receiving (value creation) is what I do offline. My professional tent is pitched offline and the work I engage does involve discretion but I also write this because I in the midst of professional transition.Online I have three formats @emerigent @markzorro and @ovurmind. It is all for my “thinking out aloud”. Offline I am free of these thoughts, they become a resource rather than an identity.I therefore “received” your thoughts, I “gave” mine – that is simply a learning relationship the way I view it; and just another cultural or personal way of approaching and conducting ourselves in our world today. I personally don’t see any benefit in having others follow my thoughts when they have the same opportunity as me to lead with theirs. The act of “following” in my case isn’t me.Thanks however for your recommendation. I sincerely do appreciate it.[Em]
Thinking out loud is how I describe “commenting” in general. If you can type fast, you can think fast.
I tend to look at “commenting” as the tap of thinking but if we are nothing but “comments” then that tap turns into vomit rather than a flow. We all carry a gut load of thinking in our heads but I look at expression far differently than comments. The key difference is “silence”. It is what turns our thinking into a self-observing form of art.JLM, my objective online is to slow my thoughts down. That I can type fast merely is a conduit to thinking fast. Thinking fast may have a benefit in a certain situation but the most I personally gain from mirroring the life of a cerebral race car driver is travel sickness – unless, I can pull back and connect several strokes of thinking.A car is a mechanical thing but a human mind isn’t. A mind is an extraordinary blessing and gift, one which neuroscience itself has only begun to fathom. So who am I (a simple layman) to know more than those whose preoccupations about the mind is a science.Typing fast-Thinking fast has one great property, in that it captures thoughts at a particular moment. This snapshot of one’s thoughts is interesting because it is written proof of our own conditioning. That society conditions us is a no-brainer – that we can look at what we have become in context of society, that is something I refer to as “learning”.When it comes to “budgeting” we have IMHO to tack one more form of “vomit” to the conditioning we are all subject to and that is ego that forms itself in a condition we refer to as identity. I find it difficult enough to set my identity aside to free my mind to the riches that DO EXIST in our resource rich world.I am not here to subscribe how others should think, I am certainly here to wrench out of my soul every ounce of value judgment making that I have made or have ever made. Thinking is thinking, it is what our brains were equipped to do, just as our hearts push blood and our livers remove toxins. What is budgeting itself but an organ of the organization – but once we pour the fat of thinking over it and then add the vomit of our own conditioning – then what is left?Learning my friend, personal discovery and learning. I am not here to be anybody’s teacher but simply learn how to be a student of life again. Don’t quote me, don’t pour too much time over my words, that is my job – what I present here is embryonic and only a the beginnings of my journey.SILENCE is a core part of my own journey. I have not mastered it. It is silence which turns what I think into self-expression. Art is a form of expression also, a great photograph removes words and replaces it with silence.Thanks BTW JLM for helping me fire of a neuron, but the trigger isn’t a gun but simply a synapses. I will shut up now and move on to my next port of call :-)[Em]
As someone who’s done a lot of strat planning and initiative development in large companies, I’d add that this is where the growth initiatives need to get funded.Here is where the rubber hits the road on your commitment to doing things ‘new’.This either happens within existing departments, or across departments. The right way to do it needs to be figured out. And measurement of their success may or may not be easily done via the existing financial system. (usually not).My experience is that the biggest opportunities in the large companies cross departmental lines; they’re opportunities in large part because they are not easily addressable via the existing structure.Need to make sure the Finance folks understand this. They probably need to have someone who’s clear on the strategy as part of their team so these important initiatives don’t get forgotten during the internal budget negotiation process.Many fabulous initiatives get de-neutered during budgeting.
Fred — do you have any posts or would you be open to discussing watch-outs or opportunities around early-stage Rev Share deals.I’d thought it was an absolute no-no. Some folks urged me to reconsider.Which ones work, which ones do not?Would make a fabulous post…..
can you elaborate? i am not sure what you want me to post about
Well let’s say you’re really early, pre-launch. You’ve modelled everything up the wazoo. But naturally you don’t really know what’s going to work and not work in the user and customer market until you’re in it.You need some more development, you also need distribution. And you don’t have much cash. And you want to retain as much ability as possible to pivot once you’re live, to respond to marketplace learnings.And let’s say — er, hypothetically — that a bunch of the vendors or partners that you talk to are willing to deeply discount or give you other things you need, in exchange for a share of revenue. Or for equity.I’ve seen some people give away a lot early that made me cringe. My gut was to always say no.A very smart coach suggested this may be a dogmatic No worth reconsidering.So I’m trying to come up with criteria or a structure to judge.I’m guessing some deals preclude other deals, and some probably make some VCs go “Ewwwww” and run in the opposite direction.Or not?Any watch-outs? Any best practices you can point out? Any disasters?Or is it so company-specific there are no general principles to apply?Thanks for noodling on it.
Ha! been there. If there is one golden rule to watch here it is: you must keep a direct touch and connection with the END CLIENT all the time. Otherwise you are always in a weak position. When you piggyback others, and revenues are high/growing enough, you are in a risk.Problems arise, surprisingly, when the revenues are growing.
by end client you mean who?
the last paying client in the chain
bookmarked for 2012.wonder if the gov budget with KPI :)BTW – the blog link from the expand DISQUS dialog (after you click the avatar) is still broken.
Bookmarked for 2011. ;)Plus, you gotta make it big before 2010 so you have enough to build a spaceship to be off the planet when you know … the world ends. Heh
off course.We want to be fat, after all 🙂
the link to what blog? yours or mine?
no, when you click an avatar and get the “expand” dialog box you have “most active sites” and “connections” with links to the person blog and twitter. The links in “connections” are broken.
I’ve had same issue.. I meant to email them about this, too much to do right now though..
A) Thanks Return PathB) Is there any idea of how many iterations this takes on mean average? I mean, I should expect some divergence (you never know…we plan and things go???)
between three and five in most cases
Thanks for the article. I can see where you are going but I have a slightly different approach.I’ve been in the planning and forecasting space for many years, both at the internal management accounting level and as a vendor selling such solutions. I stopped using the word ‘budgeting’ a long time ago. Quite honestly, using the words ‘fast growing’ and ‘budgeting’ in the same sentence is an oxymoron. There is nothing fast about budgeting. By the time it’s finished, it’s out of date. It does not have the ability to be dynamic the way the business is. Far better to produce a ‘plan’ and forecast against that, adjusting as you go along in almost real time, rather than gauge your performance off of a budget that was out of date when it was communicated out to everyone.There’s also another point to make here. The article insinuates that the whole Executive/Senior team are involved. Sure, but that’s where budgets fail because that the only team that gets involved. Operations, (where all the money is spent and made) get wind of the ‘budget’ when it’s been signed off by the ivory tower. Result – filed under T for trash. Operations continue business as usual.I’ve seen it a hundred times. If you don’t involve ALL stakeholders in the process, good luck. What you need is a top’s-down, bottom-up process, that forges agreement between all stakeholders and can be adjusted on-the-fly as business grows and/or changes.Seems your next post will be talking about forecasting, which I look forward to. I just think the whole budgeting part in a company should be transferred into a dynamic plan.
I agree the risk for fast growth companies is that the annual budget can be overly rigid and slow, leading to arteriorsclerosis. I still remember the software company I knew that too tenancy of its growth real estate in mid 2001. Oops.But I think the risk of NOT doing a more formal process is too little structure and accountability, so you can end up in the same place for the complete opposite reason. I think it’s important to lay out a three year plan, budget annually, and do a rolling forecast that can/will diverge from the budget. But at least by having the budget you can be honest with yourself about what changed – if you don’t have that sanity check, it’s easy to convince yourself that you saw everything coming.
This hits home to me – I’m currently a VP Finance for large company and do planning for my livelihood.One thing I’d add is that customer segmentation is key, especially as the business scales. As you get bigger, you tend to develop a matrix to facilitate ease of management. Product in this silo, sales/customers in the other. You need to do that. But the intersections of the product and customer are critical. If you have a product line growing 5% but you have two wildly different customer sets, you need to treat those segments differently. You may have exhausted your growth segment, in which case watch out for the anchor heading your way, or you may have attritted your decliners to a steady state and the growth will take over (pop the champagne). But if you just trend out the numbers overall, you end up steering by looking in the rearview mirror. KPIs are critical, managing by metrics are critical, and having objective data is critical – but for planning and budgeting, you have to know when to apply subjectivity and BE HONEST WITH YOURSELF about it.
you highlight that as companies increase in size and complexity the creation of KPIs and the forecast of them is now driven by the entire senior team. This a desirable state but difficult to achieve in the absence of the availability of the the right “coordination technologies” now emerging in the market. Having previously run companies much larger than this, i believe the layers of personal silos clog up the ability to model and track these KPIs. Also, senior teams need to own this process, yet most companies are organized to delegate the publishing and forecasting of these KPIs to platoons of “business analysts” assigned to departments, functions or geographies. Their role is mostly confined to the data collection, formula writing, editing and error handling of the disconnected spreadsheets that carry all this budget and performance data. Imagine 30 year old technology being the core linchpin to this critical collaborative process.So a nice end state to describe but this is unlikely to be a share process until fundamental changes percolate through organizations and people escape the inherent limitations of a spreadsheet-driven process.