So your company has grown. Congratulations. You're big enough now that you have actual departments, maybe just one or two people in each, but departments nonetheless. You're dealing with 2011 budgets, and you've told the heads of operations, IT, and marketing to come up with lists of what they'll need to reach their goals next year.
What do you do when you find you can't afford to give everybody what they want?
'It's a big issue for start-up companies as they grow,' says Murray Low, professor at Columbia Business School and founder of the entrepreneurship program there.
'When you're a start-up, you can always be hopeful that you'll break even in the following quarter, but unless someone puts a stake in the ground, and says we have to manage within our budgets, you may never achieve the necessary discipline. It's a culture shift, as a company goes from a free-form start-up to a more well organized professional organization.'
Of course, as head of the company, it's tempting to just lay down the law when there are differences over allocating the budget among departments. If your employees don't like it, they can lump it, right? After all, you're in charge. But that would be a mistake.
Your employees, the people who helped you build the company -- and may feel almost as passionate about its future -- should not be disenfranchised during the budgeting process. It will only breed bad feeling.
So, instead of a cold exercise in distributing cash, think of managing the budgeting process, and handling any disputes that may arise, as a test of your management skills, as well as an opportunity to build a stronger team.
'It's really less about the budgeting process, and more about the CEO's ability to successfully build a team,' says Ken Kaufman, chief executive of CFOWise, a firm that provides outsourced CFO services for small and midsize businesses.
With that in mind, here are some tips to help you deal with departmental budget issues this year.
Budget Disputes: Understand human nature, not forgetting your own
It's been proven in business school studies that we are biased, due to our interests and training, to evaluate problems through the 'lens' of our own experience and expertise. If we come from a marketing background, for example, we may think that business success comes primarily from a good marketing plan. If we come from operations, we may see those functions as most critical, and the same goes for IT, etc.
'We see the problems that we're trained to see,' says Richard Larrick, professor of management at Duke University's Fuqua School of Business. 'The same thing happens in a budget. We are biased to feel that the department that in our view is making the most important contribution to the business is the one that needs the most resources.'
One high-profile cautionary tale Larrick uses in his classes is the case of Lewis Glucksman, who assumed control of Lehman Brothers in the early 1980s and, when he did so, immediately reallocated profits to favor traders, because he came from a trading background – not to mention that trading was quite profitable for the firm at the time.
Though from a trader's perspective what Glucksman did may have been correct, the way in which it was done, and the ill will it produced among investment bankers, shook up the firms' structure.
So, be extra careful to not favor the department that you understand the best.
Budget Disputes: How you handle the budgeting and discussion process really matters
In dealing with interdepartmental budget issues, try to be what Susan Zeidman, a portfolio manager at American Management Association who specializes in interpersonal communication skills and management, calls a 'collaborative leader.' Such a leader 'doesn't abdicate responsibility for the ultimate decision,' but allows people to express exactly what they have to say in a respectful environment.
'Collaborative leaders create an environment where people can hash things out,' Zeidman says. 'Their employees understand the overarching goal for the business, and they understand that as long as they're working toward the goal, it's okay to speak up and have disagreements. There's trust and transparency.'
Kaufman at CFOWise calls this 'teaching the why,' where the CEO clearly communicates the big picture of where the company wants to head, and makes everyone feel involved and 'heard.'
'Heard' is indeed a good word to keep in mind, according to Professor Larrick. It isn't just economic decisions, 'it's how you make them,' he says.
The overall budgeting process, and management of the company, will proceed smoothly if your employees 'trust that the person making the decision is impartial, if they had a voice, and if they get a good explanation of what criteria were used for the decision,' says Larrick.
If these aspects are considered, he added, 'people are much more willing to accept bad news, be committed to the final decision, and carry it out.'