Budgeting 101

“Budgets are like making sausages; it is better not to see them made,” noted Otto von Bismarck, the Iron Chancellor. (As the man who combined the many German principalities into a unified nation, he was an effective manager if ever there was one.) No one enjoys the budgeting process, but it’s something that must be done. If done well, it’s worth the effort.

In October 2011, Lab Manager conducted a survey of managers to learn about some of the details of their laboratory budget processes. Slightly more than 95 percent of the respondents were responsible for the budgets in their laboratory.

Budget basics

The budget is a short-term plan for the future. To get down to the basics, the purpose of a budget is to establish a forecast of revenues and expenditures to guide one’s efforts during the next fiscal period (either a calendar year or a fiscal year, which often begins July 1). For example, according to Harry Baguma, director, Biomedics Products, Ltd., his firm’s budgeting process begins with a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the company and its product lines by managers of Biomedics’ various departments. This is the basis of determining the funding needs of Biomedics’ product lines. Consultations are held with accounting personnel and management to make sure that all cross-cutting issues are addressed in the budget.

Survey results indicate that the extent of laboratory managers’ budget discussions with senior managers varies. For example, Dennis Busiere of the Monroe County Environmental Lab (Rochester, NY) commented, “Prior to creating the budget, I meet with the senior management and highlight possible constraint issues and funding requirements.”

Discussions with laboratory staff members to determine budget needs are also important. For instance, Patty Eschliman, laboratory manager at Madonna Rehabilitation Hospital, notes, “I prepare the budget for my lab based on discussions with my staff and submit it to accounting/management for review and approval.”

Modern software can allow staff scientists and engineers to propose budgets for their own activities. Free software to do this is widely available and can be found by using an online search engine such as Google or Bing.

Once the laboratory budget is established and approved, the spending performance of the organization—and of the organization’s managers—is measured against this budget. Survey results indicate that laboratory managers usually monitor this spending on a monthly basis.

Having the actual spending come close to the budgeted amount suggests that the managers understand their business and its spending requirements. If their actual spending is dramatically above or below that budgeted, this suggests they aren’t controlling the R&D process. Their performance evaluations and salary raises could suffer as a result. Some people, including novice managers, think their superiors will be pleased if the actual spending of their group is substantially under-budget. However, spending drastically under one’s budget can result in understaffing, low morale and poor productivity from overworked staff members. Understaffing of your department often results in missed deadlines and opportunities.

For example, I once worked for a manager whose budget allowed him to hire one new chemist and two additional technicians to handle his department’s workload. However, he did not do so. Within six months, his department faced the low morale and poor productivity mentioned above. Another former manager of mine decided to limit travel costs by reducing the frequency with which his technical service specialists traveled with company sales personnel to visit customers. The result was dissatisfied customers, less effective customer service, and a slowdown in sales growth.

Of course, one has to be aware of the opposite effect: throwing money at an R&D problem to solve it. That doesn’t always work.

A representative budget process illustrating that some budget steps can be accomplished more quickly in parallel than sequentially.

Where does the money go?

It helps to understand where the money has gone in the past (see sidebar). Your lab’s previous budgets can help in this regard. Understanding how money is spent by similar laboratories operated by other companies can also be useful. The Frost & Sullivan annual survey of laboratory spending1 can be helpful here. Some of the results are summarized in Tables 1 and 2 of the sidebar. Survey results indicate that most laboratory budgets have been essentially flat since 2009.

The biggest single item in laboratory budgets, staff costs, isn’t discussed in the Frost & Sullivan survey but is included in the Lab Manager Magazine survey. Items included in budgeting were total personnel costs, incorporating salary and benefits; and capital equipment, materials, supplies and consumables. Additional budgeted items were conferences and trade show attendance, and literature.

Getting started

The SWOT analysis described above by Harry Baguma can result in a prioritized list of projects to work on in the coming fiscal year. Customers, suppliers, sales representatives, marketing executives and plant managers may all have useful input for this list. For instance, sales personnel can report new product needs requested by the company’s customers. Plant managers may request projects that will improve operations of the production plants for which they are responsible. It is important for lab managers to seek input from these stakeholders. Once all input has been received and studied, a budget needs to be determined for each project on this list.

The next step of the budget process is to consider outsourcing. A laboratory manager can obtain cost estimates from outside firms and compare these costs to the costs of doing the work in-house. This sort of activity has led to outsourcing of support functions such as building and grounds maintenance, janitorial services, security, and operation of the company cafeteria. Outsourcing of various lab activities, particularly capital- and staff-intensive ones, can also provide cost savings, thereby freeing funds to be spent elsewhere.

Time is required to assemble the project list, estimate the cost of each item and set the relative priority of each item. This process, particularly the setting of priorities, can lead to extended debates that delay the budget’s establishment and approval.

One way to prevent this delay is to borrow from the principles of project management. Lab managers know the date on which the budget must be submitted to upper management for approval. Working backward from this date, one can set a timetable for completing each step of the budget process. In essence, completion of each step becomes a project milestone. A delay in achieving one milestone immediately alerts lab managers to the fact that they must adjust the timing of the remaining steps of the budget process to achieve the required overall budget completion date.

Another principle of project management is that some project steps can be accomplished more quickly in parallel than in a series one after the other (Figure 1). By adopting the project management mindset when working on budgets and by working on some aspects of setting a budget in parallel rather than sequentially, lab managers may be able to reduce the length of the budgeting process or respond more quickly to delays in the process.

Staff members’ perspectives

It is usually helpful to include staff members in the budgeting process or at least to make them aware of its progress. They might have useful ideas on the need for new equipment or additional staffing. They could perform some of the work associated with budgeting, such as pricing equipment being considered for purchase and determining the need for various optional instrument features. Inclusion in the budgeting process can make them feel part of the team and may improve morale.

Sales representatives and members of lab service groups can ask customers to describe problems they need solved and to estimate their tech service needs for the coming year. Feedback can be used to help determine needed funding for the coming year.

Internal customers of the laboratory often make recommendations concerning the laboratory spending required to meet their goals, and then review the budget. These customers include operating divisions of the company, such as sales and marketing groups, developmental products groups, and production plant personnel.

The final stages

Once all the required input is collected, all the proposed projects—research, development, plant support and technical support—can be grouped into three categories: essential, nice to do, and do only after the first two categories are budgeted. Then, based on these work estimates, lab managers can draw up and submit a budget. This approach is effective in funding an RD&T (Research, Development & Technology Transfer) program

focused on customer needs. It also helps lab managers develop fallback positions. Should higher-level managers require budget cuts, lab managers can delete some of the third-category projects (to be funded only after the first two categories are funded) from the budget. This can eliminate tedious, sometimes acrimonious budget disagreements with higher-level managers.

Typically budgets are then reviewed by higher-level managers. Committees of senior managers at a laboratory may review the overall laboratory budget before it is sent to high-level research managers and personnel in the office of the organization’s chief financial officer (CFO). The CFO’s office in large companies typically includes financial analysts who specialize in creating and managing budgets.