Strategic Budgeting: How CFOs Drive Business Success

How CFOs Build a Goldilocks Budget

• I was sitting in a board meeting and the company had missed its forecast.

• One board member suggested CFOs should always under promise and over deliver, while another board member preferred ambitious and aggressive goals.

• This situation made me realize that the board members, CEO, and CFO often have different views on how aggressive the budgeted forecast should be.

How CFOs Build a Goldilocks Budget

Budget Setting Process and Probabilities

• The speaker discussed the importance of setting realistic revenue budgets for companies.

• The discrepancy between perceived budget achievement and actual data was highlighted.

• Measuring probabilities for budget achievement over a large portfolio was emphasized.

• The need to exercise the 'budgeting and forecasting' muscle and learn from experience was stressed.

• The speaker shared different approaches to budget setting: aggressive, conservative, and balanced, likened to 'Papa Bear', 'Mama Bear', and 'Baby Bear' from the Goldilocks story.

• Considerations for public vs. private companies and sales team quotas in relation to revenue targets were mentioned.

Budget Setting Process and Probabilities

Discussion on Managing Budget and Forecasting: Setting Realistic Goals

• The conversation discusses the approach to setting sales quotas and revenue targets, emphasizing the importance of creating a cushion between them to account for unforeseen circumstances and ensure financial stability.

• It delves into the concept of probabilities, highlighting the need for a clear understanding of the likelihood of achieving revenue targets, whether it's a 50/50, 70/30, or 80/20 probability, to ensure that everyone is on the same page.

• The discussion revolves around the philosophy of setting challenging goals to drive performance, hire great people, and expect them to rise to the occasion. The approach focuses on challenging individuals to achieve more and leveraging their potential to accomplish higher performance levels.

• The conversation shifts towards the importance of accurate forecasting in budgeting and recommends using a stagger chart to track the accuracy of revenue forecasts by comparing initial budgeted figures with actual revenue over time. This method provides insights into the forecasting accuracy and the ability to identify trends in forecast adjustments.

• There's a reflection on the significance of transparency and avoiding hiding or shading numbers when it comes to financial performance. The importance of communicating the truth, even if the news is not favorable, is emphasized to maintain trust and integrity in financial leadership.

Discussion on Managing Budget and Forecasting: Setting Realistic Goals

Strategic Business Decisions at Oracle: A CFO's Perspective

• One of the key strategic moments in my career as a CFO was during my time at Oracle when we acquired Sun Microsystems.

• We observed various business practices at Sun and questioned their effectiveness, particularly in terms of sales compensation, product SKUs, and supplier management.

• The sales team at Sun was compensated based on revenue rather than margin, leading to misaligned incentives and detrimental outcomes for the company.

• Additionally, Sun had an excessive number of SKU units, including variations based on color, which we realized were not strategic and therefore reduced significantly.

• Furthermore, their approach to supplier management involved maintaining numerous suppliers due to risk concerns, which we reevaluated and made significant reductions to benefit from economies of scale.

• These strategic insights led to changes in sales compensation, SKU reduction, and supplier consolidation, ultimately driving improved profitability for Sun after the acquisition.

Strategic Business Decisions at Oracle: A CFO's Perspective

Story of a Water Bottling Company Acquisition

• A friend of the speaker bought a series of water bottling companies that delivered bottled water to offices

• The truck drivers were paid a sales commission on everything they sold

• Pepsi acquired the company and decided to stop paying commissions to the truck drivers

• Two years later, the company's revenue had fallen in half, the truck drivers had left, and the friend bought back the company for a fraction of the price

• After reintroducing the sales commission structure, the company thrived again

• The speaker emphasized the importance of incentives and strategic decisions

• The experience taught the speaker the significance of getting incentives right, especially when it comes to human behavior

Story of a Water Bottling Company Acquisition

Conclusion:

Master the art of strategic budgeting and forecasting to drive business success. Use realistic revenue budgets, probability assessments, and transparent communication to achieve financial stability and growth. Learn from the experience of a former Oracle CFO and gain insights into making strategic business decisions that lead to improved profitability and long-term success.

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