Budget Process Killing Your ROI

Terri Long (00:01.1)

Welcome to the Elephant in the Boardroom, where we talk about the business practices we love. Love to hate, that is.

These are the practices that frustrate employees, anger customers, and hurt shareholders.

 

I'm Jeremy Eden.

And I'm Terri Long and we are the co-CEOs of Harvest Earnings. We challenge conventional wisdom, share our stories and give you advice you can use at work and even sometimes at home.

It's time to banish those elephants in the boardroom.

Terri Long (00:32.942)

Picture this. It's 2 p.m. on a Friday. You're in your seventh budget meeting this month, watching your department heads lowball their revenue projections while padding their expenses. Meanwhile, your competitor just launched a product that should have been yours, but your team was too busy playing budget theater to focus on what actually drives results. Welcome to the true crime scene that plays out every budget season.

Today, we're going to expose the four, four ways traditional budgeting processes don't just waste time, they actively sabotage your business. We've witnessed this corporate crime firsthand hundreds of times.

So here's what's really happening. Companies spend months creating these budgets that incentivize lying, kill collaboration, and reward behaviors that destroy shareholder value. We've seen teams ship half-finished products just to hit their numbers. We've watched team players become adversaries as they try to protect their own turf. And we've seen CEOs scratching their heads, frustrated by the holes and surprises that unravel throughout the year.

But here's the twist. Companies that have moved beyond traditional budgeting aren't just more efficient. They're rewarded with higher earnings and greater certainty that they'll deliver those earnings. So today, we'll do a deep dive on the problems and show you the key ways to solve them. Why is this important? Because your budget process might be the biggest threat to your growth strategy you never saw coming.

Are you ready to solve this crime, Jeremy? After that very dramatic opening, let's talk about everybody's

Jeremy Eden (02:18.421)

I am.

Jeremy Eden (02:26.52)

Is this how we normally talk in the office?

Of course. True this, we normally sing it though from the pajama game, course. True. Of course, famously, everyone, all of our audience knows the pajama game. So after, I don't know, maybe even before meetings, the thing most hated in the business world is probably the budget process. Those subjected to it all despise it. But thankfully it works really well and has a lot of good results from it.

Not. What would you like to say about it, Jeremy?

Okay.

Jeremy Eden (03:03.598)

Well, should we say what a few other people would say about it, like Jack Welch or Bill Anderson? So Bill Anderson, the CEO of Bayer Company, said the belly, that the budget is the belly of the beast of the bureaucracy. And Jack Welch, what did Jack Welch say?

He said the budgeting process at most companies, at most companies, I would say all companies, but has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization. It brings out the most unproductive behaviors in an organization from sandbagging to settling for mediocrity. Now, we don't agree with a lot of what Jack Welch did or had to say, but we absolutely agree with this one. But here's the other thing he said about it.

that we will talk about. People in the field are operating with one simple goal, albeit unstated. And actually these are two goals. So to minimize their risk and maximize their bonus. And what are bonuses often tied to? Yes. Exactly.

Me, me, the budget, meeting their meeting or exceeding their budget target. So it is well known. I mean, we are not saying even, even slightly new that people hate budgets and they know the problems of the budgets. And there's kind of four that are commonly talked about. And we want to repeat, as we often do, the people, Lisa, we've worked with over the decades across many companies.

They're smart, they're passionate, they care about doing the right thing. So not to a person.

Terri Long (04:44.524)

Not to a person, Jeremy. Take the rose-colored glasses off, please.

Not everybody, but these problems are not typically because someone's a bad actor. They occur because organizations tend to repeat what they know and what they grew up with.

don't know when budget processing started, but it has to be. Many, many decades that the budget process hasn't really changed much. There's been attempts.

And it's become something that people are so inured to. It's like, well, that's just the cost of doing business. That's just the way we have to run our business. You know, there's at least four things that lots of people, including us, have identified as creating such a big problem that it's worth solving. And I'll start with the first one.

Give me the hard one.

Jeremy Eden (05:34.382)

So the first one is, it takes so much freaking time. There are forms to be filled out and formats to be followed and numbers to be produced that don't end up contributing to the general process. There are meetings upon meetings. maybe actually even before I started that, I should have said with Jack Welch and Bill Anderson and these others, what we observe

is that the budget devolves into adversaries fighting each other over the pie rather than collaborating in actual problem solving to make one company better. And a lot of that gets manifested in these many meetings, which are basically negotiating meetings and bargaining meetings.

And as each side tries to bargain for a better thing, they go off and do another spreadsheet or ask for more data or prove that some point someone's making isn't right. But it's really about bargaining, not about figuring out the best answer.

Absolutely, and the end result is almost always a budget that is not based in any sort of reality. It's more of an aspiration than it is something that is achievable as is. mean, budget holes. Have we been anywhere lately where people didn't say, well, I have this holes? And they were built in to begin with. So, you know, what miracle was going to occur?

without some work to fill those holes. Well, if there's miracles, it's sort of our second point about the, and this one's really bad, about budgets and why they don't work. And this one is about how they are gamed. And they are gamed on both sides of the table. The C-suite, of course, wants them, they want them to be achieved, but they want them as high as possible.

Terri Long (07:40.578)

and they want to go and report to the street or to, know, to whomever needs to hear about it. These wonderful budget that is going to make their year grand. Managers, on the other hand, want to make sure that they get their bonus, which, as we've said, is tied most of the time to meeting your budget, and therefore they need it to be as low as possible.

And so that's that negotiation thing you talked about. And then once it's set, everybody has to play a game to achieve their goal. And if a manager's goal is to get their bonus, and oftentimes the bonuses of their people, there are games played. And one of the most egregious we have seen is a company or division, I should say, that needed to hit a sales target.

And shipping the product meant it was booked for them. So they actually shipped not quite finished product to a location near a customer who would then finish that project product and ship it to the customer. But once they shipped it, they were able to book it. Now, was that good for the company? Heck no. Was it good for the customer? No. Yeah. But it helped them meet their budget.

And so they did it.

And I think that the stretch goal, the game that's played on the other side of the table where the CFO is battling to get lower expenses and higher revenues, because they do often really believe, and we believe they believe this correctly, that there is a lot more earnings available. But instead of having a process that goes and finds it, it's more like, well, if I increase the pressure high enough,

Jeremy Eden (09:36.3)

suddenly managers this year will find all those earnings opportunities.

Gaming is so bad for companies. So if I'm close to me, if I'm a manager and I'm close to meeting my budget and I have a very crucial position I need to hire for, but it's going to put me over my budget, you know, maybe I wait a while, even though that's not, it's not the best thing for my people. It's not the best thing for the company, but if it meets the budget, you know, let's, let's delay that. On the other hand, if there is no shot that I'm going to make this budget.

and get my bonus and my people aren't going to get their bonus? What's the point? Why am I busting my butt? Nothing good is going to happen. And maybe, in fact, I should delay a sale, if that's part of what I do, to the next quarter to help me meet that target. Maybe I should go as low as I possibly can this quarter if I'm not going to meet it so that next quarter's target or next year's budget is reduced.

And it shows I turned it around and I turned it around 360 degrees. And there's actually a sports analogy to what you're saying. We all know that teams that are near the bottom of the league are often accused of playing dead. So they can really be at the bottom of the league. So the next year's draft, they can get the best player.

Well, they should have incentives like the English football league. You're at the bottom, you're going down. That's so great.

Jeremy Eden (11:03.308)

Yeah.

Yeah, yeah.

So that's this whole thing about gaming. take budgets, take this huge amount of time. There's a lot of gaming involved. And another problem with budgets is they really get people to focus on something that is completely valueless, which is allocations. In addition to the first two things of taking a lot of time and the gaming, there's a third problem, which is that budgets get people to really focus hard on something that's completely valueless.

And that's allocations because when corporate, you know, HR, for example, the cost of HR has to be allocated to each division and the cost of, of IT and finance has to be allocated. Well, if I can make my allocation lower, then that's good for my budget rather than actual saving real costs. Now that money doesn't go away. just makes tarot your, allocation higher, which

Hey, that's a win for me. You know, we like to call these allocations wooden nickels. It's just moving numbers around a spreadsheet without improving the shareholders value whatsoever. It may seem like, people don't, this isn't that real. We were about to do a project that was actually going to look at finding tens of millions of real opportunity and the division head and his chief of staff were trying to argue that the entire project should be focused.

Jeremy Eden (12:35.404)

Just on the allocations that division got like, all right, let's say you, we take away all your allocations, some other divisions paying for it. Cheryl doesn't care. It was insane.

Of course, predictably, the top of the house, the whole company said, what? No, no, no, no. What you think in there? So the fourth thing is that budgets are ineffective. Forget the gaming, forget the time. They're ineffective because they aren't tracked in any way that's meaningful. There's no early warning if something is going wrong. mean, there's obviously there's the quarter thing, I missed it, but you missed it.

No, no, no.

Terri Long (13:16.472)

then. It's too late. There's no accountability. There often is no accountability. So you miss it? Well, okay, you missed it. You didn't miss it? Great. Maybe you got a bigger bonus. But there's nothing for the CFO and the CEO to be able to really have any certainty about what's happening until they see the actual results. And by then, like I said, it's too late. So we had a client

years ago who said one of our favorite quotes about what we do, and that is that for the first time in his career, he knew exactly how they were going to meet the budget. He knew every idea. He knew every action. And budgets don't do that.

And every single one of those ideas was tracked every month. Did it happen? Did it yield what it was supposed to do? Or was there a problem coming up that could be dealt with before it happened? And if you go to most companies say, you you don't really track your budgets, they'll go, oh, that's not true. My God, we're, we're tracking them every month. We've got all these spreadsheets and all this data. Well, yes, you've got numbers from your general ledger that you can compare to the number in the budget, but it's not.

telling you, it'd be sort of like ways just telling you you're gonna be late without actually telling you what the route should be and how to get there. I don't know if that analogy really works, but it's a lot of information but not much insight.

You're not quite the king of analogies as we know because somebody else holds that title but you are the prince.

Jeremy Eden (14:54.318)

As long as I'm not the court jester.

Okay.

fun with budgets.

So these budgets, which take three to five months, a lot of people's time and people feel there's a lot riding on them, have significant problems of the kind we just outlined and which are widely recognized. So the question is, what do you do about it? Terri, what do you do about it?

I think you should talk about your favorite topic ever in the whole wide world, which is idea-based budgets. but first, but first, cut the blue wire. No, that's joke from Ash. are companies have tried lots of things nibbling around the edges of this to make it better. There's been zero-based budgets, activity-based budgets.

Jeremy Eden (15:34.111)

Okay.

Terri Long (15:53.61)

Agile budgeting, we're not big fans of Agile. Agile concepts are great, but Agile in practice, not so much. Very popular, and they solve some of the problems, but not enough. It is nibbling around the edges. And one thing I think people haven't tried, but again would just be nibbling around the edges, is conscious decoupling.

rolling forecasts.

Jeremy Eden (16:18.926)

Thank you, Gwyneth. What to quote whom? Me. No, I know. Other people may not know.

But you said it, Gwyneth. Gwyneth Paltrow. There's only one Gwyneth. Are there other Gwyneths? There must be other Gwyneths. Anyway, when she and Chris Martin were getting divorced, she got laughed at a lot on late night television by saying that they were not exact. I don't know if she was saying they weren't divorcing, but she described it as conscious decoupling. Consciously decoupling bonuses.

right there?

Terri Long (16:53.486)

from budgets would take away a lot of the gaming. Now, it does, I mean, I guess it would take away probably almost all of the gaming if it was done correctly, but it is very difficult to do trying to figure out what you should in fact reward. I mean, there still has to be targets and metrics and other things figured out to decide what you're going to reward, but separating those things gets rid of the gaming, does not get rid of the other.

problems.

What does, it just comes to mind now, a idea-based budget. So what the heck does that mean? So what budgets do in practice, this isn't what meetings sound like. What meetings sound like on budgets are, well, we're going to do this and we're going to do that, and our projections are this and our projections are that. But really, a lot of the real work of a budget is done during the course of the year after the budget has been done, where people are now thinking,

Well, we thought we could achieve X. We had some general ideas about how to achieve X and now we got to actually figure out how to achieve X. That's the wrong order. The right order is to have a process whereby you generate virtually all of the actions that can be taken and those actions have to meet various criteria. Like they can be budgeted. So you know them down to the chart of accounts.

and down to the positions in the HRIS system, like they have to be customer neutral or positive, other than very specific instances where you want to hurt a customer, which should be rare. These ideas should all be figured out first. And then the budget becomes a very simple exercise of essentially adding up the values of all these ideas and saying, this is what we all believe we can achieve with certainty.

Jeremy Eden (18:50.092)

I should have said that as one of the criteria for one of these ideas. It should be something that finance and the business both believe the facts justify that it could be done with certainty or as much certainty as you can get into a business setting. You know, we think is that if you spend, instead of spending three months negotiating and sandbagging and stretch targeting, you spend those same three months digging deep in the organization.

Finding problems finding the solutions to those problems identifying specific ideas and timing and values then the construction of the budget's a two-week three-week Exercise of just basically adding it all up. Yes, maybe some things have to be modified and Then putting in place and this is what people's bonuses should be based on putting in place tracking of every month every idea every now

So let me talk about that timing point a little bit more. So one of the problems we see with budgets is that you're looking out a year. You're predicting in August what you're going to be doing in November 15 months later. And particularly in these days, that is really difficult.

really, really difficult. At least we've gotten away from the three to five year budget, which used to be quite common and popular. You can't do that with any degree of certainty. In an idea-based budget, you are reacting every month. So what we had ideas we were going to implement this month, did they get done? Did they not get done? OK, let's adjust for that. Do we need a new idea because that one didn't work? Or did we over-deliver on that idea?

You're looking at it regularly and you're getting advance warning and you're able to adapt. And so you're working in real time as opposed to 15 months from now, what are we going to sell?

Jeremy Eden (20:56.686)

And I would also say there's kind of two kinds of situations, or at least at ends of the spectrum. There's the one where you can't really know 15 months from now what the tariff is going to be or 15 days from now. You can't really know if your competitors promise to come out with the new killer product is really going to happen a year from now or not. So that's that class of ideas, which take a lot of focus by a lot of people during budgeting and during the year.

or 15 days from now.

Jeremy Eden (21:26.604)

What's missed though, and what an idea budget can get at is there's lots of ideas that in fact you can know right now. I should be doing this and maybe I'm not going to do them all at once. So I'm going to map them out and eight months from now I'm going to do this idea, but it's not uncertain at all that that idea should be done because I know I'm wasting money now. And no matter, no matter what the world looks like.

I'm going to continue wasting money if I don't change that work.

Yeah.

So in summary, the budget approval process is very bad. For example, encourages budget gaming. It denigrates a culture of accountability, or what some people call organizational accountability. It's denigrated. It's not looking for expense management solutions, really, just numbers that might reflect some savings. The variance tracking is terrible, and this is one of the problems, particularly going to rolling forecasting, but even normal

budgets is forecasting is very often inaccurate and forecasting accuracy is a major problem and yet a lot of sales and revenue are built on it. Budget variance analysis tends to be very weak and people's budget management software doesn't track what's important, which is what actions need to be done, what work needs to be changed, what actions do we promise we're not doing. Instead it tracks

Jeremy Eden (23:01.678)

You know, general ledger, the cost center number X this month versus last month.

You know what else it doesn't do? It does not engage employees. Employee engagement is zero on budgets other than the people in the room, which is generally middle manager or higher. It is not the people down the line who often know a whole bunch of ideas that could improve the company.

That is a summary of what we've just talked.

Well done. Thank you and goodbye.

And good luck. Good night and good luck.

Terri Long (23:41.806)

Hey, good morrow.

Thanks for listening. learn how Harvest Earnings helps large companies overcome the bad practices, visit our website, HarvestEarnings.com, or email us at info at HarvestEarnings.com.

Also, please subscribe wherever you get your podcasts. And if you're feeling generous, leave us a rating and a review. It really helps others discover the show. Until next time, I'm Terri Long.

And I'm Jeremy Eden, and now it's time for us to get back to work. Bye.