The Sandwich Approach to Budgeting

March 2006

As I see it, you can approach budget creation in three different ways.

1. From the top down
2. From the bottom up
3. Sandwich

Yes, the last bullet is not parallel—I want it to stand out! Because that is the preferred method of budget creation.

Let’s look at the pros and cons of all of the approaches.

The Top-Down Approach

In the top-down approach, uppSer management or the directors tell the front-line folks what their budget will be, without the input of the front-line folks.

The top-down approach can be likened to a parent-child approach to budgeting. The child asks for the cookies and the ice cream and the popcorn and the pizza and the parent says, “No! You can’t have that. You are going to eat this yummy cabbage.”

Now, if the parent is particularly persuasive and strong, the kid may eat the cabbage. But then the kid wakes up in the middle of the night, goes down to the fridge and eats everything in sight, throws up, and goes back to bed. Folks are going to do what they want to do!

I conducted an audit of the Texas prison system many years ago. The organization, at that time, was very patriarchal. Just a handful of very controlling men told everyone when to breathe!

I visited a brand-new prison just outside of Austin (by the way, you can skip that experience if it is ever presented to you!) and I noticed that the warden’s offices were furnished pretty shabbily. The administrators seemed to have brought furniture from home.

I asked the warden what was going on and he said that he had the same budget as every other warden in the state. He said that the big cheeses didn’t care how old or how new facilities were—everyone got the same exact budget. Talk about flexible! J

He then went on to tell me how he got around this problem. He went downstairs in the middle of the night and ate everything… wait, different kid. This 55-year-old kid told me that he and a few trustees took the melons and veggies grown on the prison grounds and held a farmers’ market in town on Saturday mornings. He had collected over $1000 so far and planned on using it to buy a computer. (This is illegal, by the way! The prisoners are supposed to eat that food!)

But it is an excellent example of how folks will rebel—either quietly or loudly—to the top-down approach.

What is the advantage of the top-down approach? The creation process is FAST! If no feedback is solicited, the parents—I mean the boss—can do whatever he wants.

The Bottom-Up Approach

This approach allows the employees to ask for and receive whatever budget they like without input from upper management. This can also be called the spoiled-brat approach.

Here the children, excuse me—the employees—get whatever they want whenever they want.

The advantage of this is that the children are happy, happy, happy! But what children don’t know can hurt them. Without guidance, things can go very badly in the long run. The children can end up with a crashed Ferrari, pregnant, and in rehab.

One of my girlfriends was lucky enough to work for a fun, fabulous advertising firm in Austin during the dot-com boom. This town was all about flash and money for about five years. The dot-com industries, funded by venture capitalists, were spending like crazy—and advertising was one of their favorite expenditures.

She had the best equipment and an office with a view of the lake. They had parties all of the time and everyone was so happy and in love with each other. Spending, spending, spending…

And then one day, the owner called the employees into a meeting and informed them that the bottom had dropped out. The company had gone bust and he was sorry to tell them that he was moving back to LA and they could all pack up their stuff.

The children, excuse me, the employees, were devastated. “How can all that love and fun go so bad?” they wondered. All the happy little children were unemployed, pregnant and in rehab.

An advantage to this approach is that it is fast AND it involves very little conflict—until the fateful day when it all falls apart in a serious way.

The Sandwich Approach

I also call this the peer-to-peer approach. Some version of this approach is ideal. Depending on your culture, it can be a little top-heavy or a little bottom-heavy… but the sandwich does involve some mess, some conflict—and because of that involvement, it takes a lot of time!

I liken this approach to a peanut-butter-and-jelly sandwich. It is messy and squishy, but everyone sort of blends together for a yummy favorite.

One of my friends, Paul, is a CFO-for-hire. He is hired when companies feel like their finances have gotten out of control and one of the first things he does is to institute a budget process.

Paul uses the sandwich approach. He facilitates a retreat with the directors and top executives of the company and asks them where they want the company to be in the next year, the next five years, and the next ten years. At his retreat, the top dogs spell out what products they want to introduce, what markets they seek to enter, what they want the stock price to be, what they want earnings per share to be, what other big plans they have for the organization, and so on.

Paul then documents these broad initiatives and goals and calls a meeting with the division heads. Paul presents the initiatives and goals and gives the division heads directions on how to create a budget. He then tells them they have two weeks to create a budget that will support these broader initiatives and goals. This meeting takes about two hours.

At the end of two weeks, Paul collects the division directors’ budgets and compiles them into a master budget spreadsheet to see if they—in combination—meet the broad initiatives and goals. Any guesses if they do? No, they don’t. They never do.

Most division managers will low-ball revenues and exaggerate expenses so that when you combine the items all together, you get a low profit result (high expenditures, low revenues).

Paul meets again with the division directors—this time for a series of long, painful meetings—where he asks them to sacrifice in order to meet the executive’s broad initiatives and goals. This is where the PB&J sandwich gets ugly and squishy.

Once Paul feels like all of the division directors have given all they can give, he takes the results back to the executives and asks them for a little give of their own. This is another painful meeting—or two.

But what you end up with is something everyone has bought into and can live with.

What is the disadvantage to the sandwich approach? It involves mature confrontation and a lot of time. The advantage of this approach is that it is mature and a relationship between peers. Not a parent-to-child or child-to-parent approach.