Many businesses make the mistake of establishing an overall company budget, but then fail to break that budget down by department. As a result, some divisions of the organization are chronically running over budget, while others are constantly being squeezed. Once you’ve worked out an operating budget for your organization as a whole, set individual budgets for each department or branch, and hold department heads accountable for those budgets.
Let your divisional managers know that the rewards they can expect will depend on how successfully they use the resources budgeted to them. If the manager marshals those resources effectively and the department is successful, that individual deserves to share in the fruits of success through bonuses or other forms of compensation.
That’s only good business sense, but you would be surprised at how many organizations don’t operate this way. Failing to establish budget goals on a department by department basis can create chaos within a company. I know of businesses that have been literally crippled because they neglected to do this.
Take the case of the publishing company that budgeted $100,000 for legal expenses during the year. The company’s magazine division encountered some legal claims which could have been resolved quickly for well under $5,000. Instead of settling, however, the department decided to fight the claim and retained a law firm. Unfortunately for the publisher, the legal expenses exceeded estimates and by the time the dispute was finally resolved, the company’s entire legal budget had been exhausted.
Later that same year the publisher’s textbook division encountered a legal pothole of its own. At that point, however, the cupboard was bare, the publisher’s legal budget was gone. Through no fault of their own, the people in the textbook division were left to choose between several equally unappealing options.
The root cause of these problems was the fact that the publisher did not set departmental budgets and did not hold its divisional managers accountable for those budgets. The people in the magazine division regarded the corporate legal services budget as Other Peoples’ Money! Rather than spending $5,000 of the division’s “own money” to settle a claim, they chose to spend $100,000 in “OPM” to fight it!
The failure to hold business managers responsible for their own budgets can create other problems within an organization. Suppose, for example, we take an automobile dealership and organize it into a new car department, a used car department, and a service department. Let’s say the dealer’s overall advertising budget for the year is $500,000. If at the start of the year the new car department contracts for ad placements costing $500,000, there’s nothing left in the kitty for the used car manager or the service manager to promote their departments.
The owner would then have to decide whether to come up with additional money for advertising, or to allow the used car sales and service departments to suffer for lack of promotional funds. In this case, besides creating serious problems for the company, the absence of departmental budgets lead to a grossly unfair situation for middle managers whose income is linked to the performance of their departments.
The correct way to handle this situation would be for the dealership to earmark, say, $300,000 for new car advertising, and $100,000 each for used cars and service. But then what’s to stop the new car manager from spending most or all of department’s ad budget during the first quarter, leaving little left for the rest of the year? Nothing! But perhaps that would be a wise decision given the market conditions at the time. In any even, you’ve hired that manager to make those decisions. If you lack confidence in a particular manager’s judgment, replace that person with someone you do trust. Most of all, make your department chiefs aware that they will be held accountable for using the resources budgeted to them to perform successfully.