I've found that annual budgeting exercises are one of the least understood tasks for the new department manager. It's not something that's generally taught, and often learned through trial by fire before gaining entry into the inner financial sanctum. Even if the calculation methods are provided, the negotiation process remains a mystery. It does not need to be such a daunting task.
Here are some tips for the second budgeting activity, the annual budget negotiation.
1. Every negotiation usually ends up between where the two parties start.
2. Be confident that what you are proposing makes good business sense.
3. Know the company's total expense growth target before you start. If you're out of whack with this, you'll have a tough time defending your forecast.
4. Unusual increases will require unusual justification to back it up.
5. Identify each line item or its increase as a must-have, important-to-have or nice-to-have.
6. During the negotiating process, give up the nice-to-have items first, resist on the important-to-have items, and dig in your heels on the must-haves.
7. Be prepared to explain and defend each and every line item. Simply growing it by some percentage won't cut it.
8. Present summary information first. Do not provide additional details unless asked.
9. If presented with a percentage-to-cut directive, do not cut your line items across the board. Do it in priority order, with the lower priorities getting sliced first.
10. Every department has to cut something as the overall company budget is finalized. Don't be the one caught without anything to cut.
11. Always reserve 5% of your budget as a fund for the unforeseen expenses, and as your margin of forecast error. Factor this into reserves or other large line items.
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