Where Did You Get That Number?

June 2008

Your director is under pressure to increase revenues and cut expenses. She pulls you and all of the managers together in order to scrutinize the budget and find some cost savings. During the meeting, she turns to you and asks “Chandra, where did you get that number?” You lamely sputter an explanation of why you estimate revenues to be lower in your department than they were last quarter, because you really don’t know where that number came from! Your director rolls her eyes and you finally admit, “I’ll have to get back to you on that.” Ouch. Bye-bye credibility and political power.

Everyone who has worked with budgets before knows that budgets are guesses about what is going to happen in the future. But you don’t want folks completely pulling the numbers out of the air—leaders prefer that managers make an educated and informed guess that is supported by some sort of evidence.

Nothing gets a budget accountant’s freak-out meter spiking faster than a manager who is clueless about their numbers. Credibility is everything in this game, and if you don’t have a rationale for your numbers the budget accountant and everyone else wonders about your honesty and your maturity. And when you lose credibility, you lose the political power to negotiate for what you want.

Why would anyone give money to a manager who has no idea how to take care of the money?

Just like you don’t hand the car keys for your new sports car over to your 14-year-old student driver, you don’t give significant amounts of money to someone who spouts out phrases like, “I never liked finance.” “I don’t know the first thing about money.” “I avoided accounting and finance in college like the plague.” “I am a creative person and can’t be bothered to worry about money.” “I let my husband balance the check book and take care of the finances. I am completely clueless about money.”

Remember the story in the Bible about the talents? The master gave each of his servants some talents. One buried his in the ground, one invested and earned a modest return, and one worked diligently and earned great returns. The master took the talents away from the one that buried his talents in the ground and gave them to the hard worker. Any good businessperson would do the same. Yes, Jesus covered just about every topic of relevance, including budgeting!

Poor documentation cost one budget analyst her job

As we were covering this concept in one of my classes, a very professionally dressed and coiffed woman admitted that she had lost a job as a budget analyst because she was unable to explain herself. During a budget meeting, someone questioned her number and she said that she would “get back with them” later.

She went back to her desk to recalculate her number and couldn’t do it! She worked on it for a couple of days before she admitted that she couldn’t come up with the same number. She wasn’t fired outright, but her credibility was so damaged that she decided that she needed to move on and promptly found another job.

Save yourself from embarrassment

So how do you save yourself from looking like a fool during a budget meeting? First, back up all of your estimates with some sort of evidence. Second, write it down somewhere.

1. Back up your estimates with evidence
   Find something to support your numbers: a document, last year’s actual results, benchmarking against some similar operation—anything that shows that you thought about the numbers objectively and did your homework.

There are plenty of sources of evidence that you might want to consider. Let’s use a simple example to illustrate the sources of evidence—let’s say that you want to support a budget request for repair to the parking garage. Some genius backed their truck into it a few months ago and it is an eyesore and is possibly compromising a support beam.

• Physical evidence—Physical evidence is obtained through your direct observation of an object or event. You could take a picture of the wall as proof of its damage so that when someone questions you show them the picture.
• Documentary evidence—Documentary evidence, is, you guessed it, in the form of a document. Third party documents are usually better than documents you get from someone who is biased. For this, you could get a few bids from contractors or engineers with estimates of how much it would take to fix the wall. You could also see if the organization has paid for any such repairs in the past and use that to support your numbers.
• Testimonial evidence—Testimonial evidence is the weakest form of evidence you could use to support your numbers because folks change their mind, lie, or forget what they told you. Try not to use this sort of evidence to support your numbers very often, if at all. For our example, you could interview the maintenance crew to see how much they think it is going to cost. Here you are letting someone else pull the numbers out of the sky instead of you doing it yourself; not exactly convincing!
• Formula/model—You could devise some sort of model or formula that would help you estimate the cost. If you had repaired a wall in the office complex last year— although it was a bigger repair, you could come up with an expense for repair per square foot. You could then take the number of square feet of the needed repair and multiply it by this square foot price. You can, of course, get much fancier with this—and many analysts do—plugging in several variables to their model. I once taught a course written by the AICPA called “budget forecasting” that included ten or so very complex models. Much of the strength of the model comes from the variables you choose and the assumptions you make about those variables. More on budget assumptions next month.
• Trending—You could plot past amounts on a graph to see if you can discern any predictable pattern of behavior. If there is a pattern—say that construction expenses per square foot went up 7% each of the past five years, you could predict that construction expenses would be 7% higher than years past. Or, if you know that a significant trend will affect the numbers (in this case the rapidly rising cost of gas and steel) you can use that to bolster your conclusions. I would get some kind of documentary evidence (maybe a newspaper article or report) that backs up the trend you are assuming.

One piece of evidence might not cut it if you are dealing with a controversial or significant number. You want sufficient—or enough—evidence to back up your assertions. Imagine yourself standing in front of the board of directors and justifying your estimate. If you get a weak feeling in your stomach when you think about relying on just one piece of evidence to support your claim, gather some more evidence, and some more evidence, and some more evidence, until you feel confident that you could comfortably discuss this number with the board. Again, everyone realizes that you are guessing, they just want you to have reasons behind your guess!

2. Write it down
   I recommend creating a folder containing backup for each of your numbers and all of the evidence that you have gathered. That way, when the director says, “Chandra, where did you get that number?” you can open up your file and say, “Well, sir, I obtained three bids from three reputable contractors ranging from $17,500 to $26,000. I took the most conservative estimate of $26,000 because I wanted to make sure to budget enough. I recommend using the middle bid of $19,750 but would plan on it actually costing closer to $26,000.”

Your director will be wowed and comforted. After a few answers like that one, your director will know they can trust you and they may stop asking you for more detail all together. They have other managers who need closer scrutiny—but not you! You have your act together.

Here are some tips to keep your documentation top notch and ready to support answers to those tough questions:

• Include a description of the data, trend, or model you are basing your figures on so that you will remember what evidence you are using
• Scan in or bind add any supporting “third-party” documentation or other documentation so that you can pull it out and wave it around when quizzed
• Date every page so that you know which page is the most recent
• Date, initial, and explain all changes because there will be plenty of changes
• Include management approval of the changes or revisions in your binder to help management remember their own choices
• Keep “old pages” in the file to prevent you from going down the same worn, senseless paths when developing next year’s budget and to answer questions
• When striking through an old page, include a brief explanation of why this page is obsolete in case you forget why you rejected it
• Keep any variance reports regarding this item throughout the year so that you can create more accurate projections on the next go round
• Remember that others may use your file so document so that others can easily see what happened (maybe you won’t have this job forever… and you don’t want to leave the next person hanging!)
• Try to make each section contain the same elements in the same order so that you can easily find what you want within seconds

One of my first jobs involved working for a wheeler-dealer named Mike. I was Mike’s controller and budget analyst and he did everything he could to shake off his responsibility to comply with a budget. I’d show up at work on Monday morning and have several messages from Mike on my voice mail asking me to change this number or that number on the budget.

I obliged a few times, until Mike accused me in a meeting of changing the numbers without his permission. When he busted his budget wide open, he could say “That wasn’t my number! I don’t know where Leita got that!” From then on, I would write on every change “Changed per Mike on April 9, 2001 10. a.m. call” and then try to get him to sign it. He only tried that trick on me again twice—and both times I pulled out my handy-dandy binder and said “Here, Mike. Here is the note showing that you approved this change.” On to his next (of many) budget avoidance tricks—that one was spent.

Due diligence

So, be prepared by backing up your budget estimates with evidence that is thoroughly documented. Yes, your estimates will probably still be wrong anyway—because you are guessing about an unknown future—but you weren’t wrong because you made the number up on the fly; you actually worked hard to be wrong, and that is all anyone can honestly expect of you. Due diligence, I’ve heard it called.