An Operations Manager's 4 Step Guide For Budgeting Season

Budget season is upon us and in this week’s issue, I’ll share 4 steps I’ve learned in many years as an operating leader going through the budget process.

If you are lucky, your budgeting process is underway and you’ll be asked for your input but in some cases, you’ll be given a top-down number for the future year's budget that you will need to find a path to delivering on.

In a world of ever-increasing accountability, I’ll touch on the steps I’ve used to bring about clarity in assumptions and engage my leadership teams over time in a transparent way.

By focusing on these 4 steps, you’ll build credibility with your financial planning and analysis teams, while giving yourself and your direct reports a fair chance at success in the coming year.

This is about the clarity of your written assumptions

Here are the 4 Steps that I found most helpful going through the process with a simple example you can follow:

Step 1: List out operating activities for each key cost line

As best you can, you will need to know what your cost drivers are.

Examples of drivers(operating activities) include number of vehicles, miles driven, number of drivers, number of employees, number of stops and so forth.

Next, understand the cost per activity, as an example, leasing costs per month, cost per mile, driver labor cost per month, employee cost per month, cost per stop and so forth.

Ensure you are also factoring the number of days in the month if that affects your financial outcomes as shown below

While in some cases this is difficult, getting good at this level of detail is critical to effective budgeting and review after the budget period.

Step 2: Build a Run-Rate Based Submission

Next, Build a model assuming there are no improvements in your process over the coming year.

That’s called your run rate model. It will simply take your activities and cost per activity in each month and calculate those out as shown below.

The important point here is to lay out what your financials will look like if nothing changes in your existing processes.

Step 3: Brainstorm improvement initiatives to improve your financials and headwinds you may face

Next, Brainstorm and list out improvement opportunities with your team and the potential financial impact of those activities.

A good framework for brainstorming improvement initiatives is ECRS which stands for Eliminate, Combine, Rearrange or Simplify. More on that process is https://www.lean.org/the-lean-post/articles/the-art-of-lean-use-these-tools-to-help-you-improve-a-process-part-1/ but an image from that post is linked below

You also need to include headwinds that may negatively affect your financials in the budgeting process. As shown below, you’ll want to lay out the improvements(green font) and headwinds(red font)

Step 4: Revise your budget submission to account for the fallout of your improvement initiatives and headwinds

In my operating experience, we never get everything we planned for so we need to account for that in our budgeting process.

We do that by assuming only 70% of the opportunities the team can identify will materialize and then base a budget submission on that.

Here is what that may look like below in 4a where we multiply our results from Step 3 by 70%.

The numbers shown in Step 4b is what I’d suggest you submit if given the opportunity.

Then you need to work with your team to monitor and achieve your budget commitment

One more thing: What happens if you get a target beyond what your numbers can support?

That may happen and what is important here is to highlight the risk to achievement if you do not have the assumptions to support a more aggressive target. Simple Not Easy 🙂 

Thanks for reading. Have a great week!

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