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​Read Online Here​

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Hey Reader,

So your company is growing.

Marketing is spending money. Sales is spending money.

And at the end of the month, finance gets one giant P&L and has to answer a pretty simple question.

Who actually owns all of this?

I'll be honest with you, I've watched companies get this wrong more times than I can count.

And it's never a dramatic failure. It's just hours of unnecessary work, every single month, forever.

Somebody in finance sitting there trying to remember whether that software renewal belonged to Marketing or to Engineering.

That's the real job of departmental budgeting. It puts a name on every dollar.

So today I'm walking you through the whole thing. How to structure your data, how to work with department heads without drowning them, and how to hold everyone to the number once the year is actually running.

There's also a line a CFO gave me years ago that reframed this entire process for me, and I'll get to it near the end.

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Alright, so let me start with where financial statements actually come from.

It begins with something happening. A card transaction posts, a vendor bill comes in, an expense gets recorded.

Every one of those gets categorized to an account in your chart of accounts, maybe travel expense, or software expense, or contractor expense.

And that tells you what the transaction is.

With departmental budgeting you need one more piece of information. Who owns it.

Was that software expense for Marketing? Sales? Engineering?

I see companies handle that second tag one of two ways.

The first is what I call a stacked P&L. General and Administrative sits at the top with all of its expenses underneath it, then Sales and Marketing sits below that with all of its expenses underneath it, and so on down the page.

The advantage is real, because in one report you can see every department, every expense category, and multiple periods side by side.

But here's where it falls apart.

Say the head of Sales and Marketing wants to see their budget. Now you're exporting the report, deleting a bunch of rows, fixing the formulas that broke when you deleted those rows, and saving yet another version of the file.

And every new department makes that P&L taller and harder to read.

Which is why for most growing companies I prefer the second approach.

Instead of building the departments into the structure of the P&L, you keep the P&L clean and tag each transaction with its department as a separate field.

So the report in front of me shows expense categories for G&A, and with one change the exact same report shows Sales and Marketing.

That works because every transaction has now been tagged twice. First by what it is, second by who owns it.

And that second tag is the whole game. It's what lets me hand each department head a report containing only their information, and it keeps my main P&L from multiplying by every department in the company.

There is one catch though.

If every transaction needs another field coded correctly, you've just created a pile of extra work for your finance team every single month.

I go deeper on both structures in the video if you want to see them side by side.

Fortunately, there's a way around that.

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Okay, so think about which of those financial events create the most volume for you.

For most companies it's corporate card spending and bill pay. Hundreds of small transactions, every one of them needing that second tag.

And the best systems don't leave finance to reverse engineer all of that after the fact.

They capture the information right at the moment of purchase, from the people actually making and approving it.

Revolut Business works that way, and they were nice enough to sponsor this one.

You can issue physical or virtual corporate cards to people on your team and put controls around how those cards get used.

So your team makes the purchase, adds the relevant information, and categorizes the expense themselves, which means nobody in finance is chasing receipts around the company on the third of the month.

The same idea applies to bill pay.

You want the people who own the expense reviewing and approving it, rather than finance deciding on its own whether a bill should go out.

Revolut Business lets you build those approval workflows, pay your vendors electronically, and then sync all of it back into your accounting system.

So adding departments to your financial data doesn't have to mean adding work.

You just move the work to the person who already knows the answer.

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Now look. This is where I see most companies drop the ball.

They send a department head a report that looks like this and say, hey, can I get your budget?

Two problems with that.

The first is information overload. Where do they even start? What are they supposed to be looking at?

The second one matters more. Most department heads don't have a background in finance or accounting, and honestly, they shouldn't need one.

Your head of Sales might come back and ask why you only recorded $10,000 of revenue this month when the deal she closed was worth $120,000.

She understands the business better than you do. She just doesn't think in revenue recognition and accruals.

That's your job. Sit with them, explain what they're looking at, and tell them exactly what you need back and how you want it.

And when I build a departmental budget, there are three things I'm collecting.

The first is people. Headcount is usually the biggest number on the P&L and the hardest one to walk back if the year doesn't go to plan, so I want to know who's there today, what they cost, and who they're planning to hire next year.

The second is existing spend, and this is the one that changes the whole conversation.

You'd be surprised how many department heads have no idea what they've already signed up for. The subscriptions, the agencies, the tool somebody expensed in March and forgot about.

So instead of asking what they think they'll spend next year, I show them what they're spending right now. I export the general ledger transactions and build a PivotTable so they can see exactly where their money has been going.

Now they can just react. Keep this. Cancel this. We need more of this. We stopped using this in June.

That's a completely different exercise than handing somebody a blank sheet of paper.

The third is new spend. The conference they want to attend, the software they want to buy, or the presidential suite they've decided they need at this year's offsite.

For those I give them a simple table where they tell me what they want, when they need it, how much it costs, and why.

I show all three collection templates in the video.

People, existing spend, new spend. That's the budget.

And then you bring it to leadership, and leadership says absolutely not.

Which is when you go back to the department head and say, we asked for $300,000 and we got $200,000, so what matters most to you?

That's the part of finance nobody puts in the job description. Helping the company make the tradeoff, and occasionally carrying the bad news.

Which brings me to that line I mentioned at the top. A CFO said it to me years ago and I've repeated it every planning season since.

Budgets should be collaborated on by many people, but owned by one person.

That one person is you.

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So we're done, right?

Not quite.

Every month from here you run budget versus actual and drill into the biggest variances.

Only this time the explanation isn't sitting entirely on your shoulders.

You go back to the department heads who own those budgets and ask them what happened.

That new hire we approved, are we still bringing them in, or did it slip a quarter?

You've used half of this expense budget in the first month, was that the plan, or are we going over?

Because reporting the variance is the easy half. The real job is making sure the person who owns that budget understands why it moved and what it means for the rest of the year.

And when those expectations change, there's one distinction that matters more than anything else in this whole process.

You don't go back and change the original budget.

That number stays exactly where it is, because it's the benchmark everybody agreed to, and it only works as a benchmark if nobody edits it after the fact.

Instead you take the new information and update your rolling forecast, so leadership always has the most current view of where the company is heading and how far that has drifted from the plan.

I walk through the full budget versus actual report in the video if you want the deeper cut.

Get that separation right and the budget stops being something you built in November and never looked at again.

Now look.

Running budget versus actual across every department every month is real work, and it's the first thing that slips when the close is already running late. That's a big part of why we built Model Wiz.

And if you want to go deeper on any of this, I'm running a live session on the whole departmental budgeting process on Wednesday, November 4 at 11 AM ET.

I'll walk through the structure, the templates I send department heads, and the budget versus actual report, and you can ask me anything at the end.

Save your spot here: luma.com/mighty-digits​

Now I'm curious about you.

How many departments are you budgeting for right now, and which department head is the hardest one to get numbers out of?

Hit reply and let me know. I read every single one.

Josh
Your CFO Guy

Quick note: While I love sharing my finance & accounting knowledge, remember I'm Your CFO Guy, not Your Personal CFO. Everything I share comes from my experience, but each business is unique. My content is educational, not professional advice - always consult with your own qualified advisors for decisions about your specific situation.