With the annual budget cycle comes the process of setting
targets. These are set for each area whether it is revenues or costs and then
trickled down to cost-center owners or functional owners. During the goal
setting process, there is constant back and forth between the bottom-up process and top-down expectations.
Even though companies have backed away from top-down goal setting, every
company gives guidance and has a strategic outlook for the growth of the organization.
On the other hand, the bottom-up process
helps us understand the needs of the functional managers who recognize the needs at the lower levels of the
organization.
But the give-and-take process between the bottom-up and top-down processes often leaves
a feeling of dissatisfaction for all parties. The managers who worked to
develop a bottom-up approach sometimes believe
that their inputs were not taken into consideration and a number was just
passed along. On the other hand, top management spends a lot of time managing
the politics between different groups and divisions and come to think that
strategic needs are not taken into consideration by the functional managers.
Target setting that has become part of the annual budget
cycle is an important exercise for any company. As stated in a Small Business
Chronicle article,[1] “Successful companies set
goals. Without them, they have no defined purpose and nothing to strive for;
consequently, they stagnate and struggle for meaningful accomplishments.” For
the goal setting to be a meaningful exercise, all parties should understand “why”
certain decisions were made and the process should be transparent.
The bottom-up process is a very
meaningful exercise to appreciate the perspective on the shop floor.
Transparency should be built at each step during a bottom-up process to understand assumptions and
the what-if scenarios. The senior managers need to know the impacts and risks
of various scenarios without cushioning the numbers. On the other hand, top
management needs to provide some high-level guidance on the overall market
expectations and guidance to help the teams below understand how decisions will
be made during the budget process.
Financial Planning and Analytics
(FP&A) teams own the annual budget and strategic planning process for companies.
Building transparency of assumptions from the bottom-up and guidance from the top-down
helps to streamline the process and reduce friction. The reconciliation and
decision-making meetings should be done in a more working-session manner with
the ability to do what-if scenarios. This would allow stakeholders to
understand the impacts of their decisions, reduce the effects of politics and
lead to more data-based decision making. Collaborative technologies, cloud-based
computing, and technologies mining big data can help streamline the target-setting
process and FP&A has a big part to play in making this process more digital,
collaborative and analytical.
