# Budgets people believe > Top-down targets, bottom-up detail, and no padding. - Course: [Finance for Product People: From Unit Economics to Business Cases](https://productovi.com/courses/finance-for-product.md) - Module: What will next year look like? - Lesson 27/32, ~26 min - Source: https://productovi.com/courses/finance-for-product/budgets-people-believe ## Two numbers that don't meet **Alex Tutor:** Back at Klasna's product team: the board's profit target and the teams' budgets don't match. **Leo:** The board gave us a target: 3 million of operating profit next year. The teams have sent their budgets, and Hanna says they add up to barely half of that. **Hanna:** 1,523,968 UAH. From the top: 3 million. From below: 1.5. One of them has to move. **Sofia:** Couldn't we just ask every team to cut 10% until it fits? **Alex Tutor:** Hold on. Before any cutting: what does each of the two numbers actually tell us? > **Exercise:** Klasna's board wants 3,000,000 UAH of operating profit next year; the teams' budgets add up to 1,523,968 UAH. Which way of treating the two numbers is right? **Alex Tutor:** That's how budgets lose people's trust. A target from the top says what the business needs. Detail from below says what it takes to deliver. A **budget** people believe joins the two through drivers, not through one percentage that hits every line the same way. **Hanna:** And before we argue about the gap, I want to know whether the bottom-up numbers are honest. > **Exercise:** Match each budgeting term with what it means at Klasna. ## Where the padding hides **Hanna:** Support asks for four coordinators in every month of the year. **Sofia:** But the rule is one per started 400 learners. With the forecast's learners that's 37 coordinator-months, not 48. **Alex Tutor:** Eleven extra coordinator-months at 38,000: 418,000 UAH. And marketing? **Hanna:** 3,400,000. The month-by-month plan they gave me for the forecast adds up to 3,090,000. The rest is "just in case". **Alex Tutor:** That's **budget slack**: costs set high, or sales set low, so the budget is easy to beat. Nobody is quite lying. People have been blamed for missing a budget and never for beating one, so they protect themselves. **Leo:** Last year support came in well under budget, and I congratulated them in front of everyone. > **Exercise:** Support asked for 48 coordinator-months (38,000 UAH each) where the rule gives 37, and marketing asked for 3,400,000 UAH where its own plan adds up to 3,090,000. How much **padding** is in these two requests together? ## Closing the honest gap **Sofia:** Without the padding we're back at the forecast, 2,251,968. That's still 748,032 short of the board's 3 million. **Alex Tutor:** Leo is about to ask every team for 10% more. First pick the honest way to present a gap like this. > **Exercise:** With the padding removed, Klasna's budget is 2,251,968 UAH of operating profit, 748,032 UAH short of the board's 3,000,000. Each lesson leaves 187.25 UAH. How should the gap go to the board? **Alex Tutor:** Now the gap is honest, and you close it the way the forecast was built: through drivers. Ask what would have to be true. **Hanna:** Start with volume. Each lesson leaves 187.25. How many more lessons would the year need? > **Exercise:** The honest gap between the forecast and the board's target is 748,032 UAH. Each extra lesson leaves 187.25 UAH and fixed costs don't change. How many more lessons would the year need? Round up to a whole lesson. **Hanna:** Or the price: about 9.57 UAH more per lesson on the average, across all 80,128 lessons. **Leo:** Four thousand lessons is less than half of one May. Ten hryvnias is a pricing decision. Those I can discuss. **Alex Tutor:** Each option has an owner and can be checked during the year. Or the board accepts 2.25 million. All three are honest answers. A 10% cut on every line is not. ## Rules for a budget people believe **Alex Tutor:** Three rules. Every line comes from a driver someone owns. Owners are judged on their drivers, not on spending less than they asked for. And uncertainty sits in one visible reserve held by finance, not hidden inside every line. **Alex Tutor:** Now test the rules on a good surprise: May comes in busier than planned. > **Exercise:** Klasna's budget gives support one coordinator (38,000 UAH a month) per started 400 active learners. The plan for May was 1,460 learners; **1,620** came. What coordinator spending does the rule allow for May at actual volume? **Hanna:** And we judge spending at actual volume. If learners beat the plan and support needs a fifth coordinator in May, that's not overspending. It's the rule working. **Sofia:** So a fifth coordinator because learners grew is fine, but four all year "to be safe" isn't. **Alex Tutor:** Right. A budget is a promise about drivers, not a pot of money each team defends. > **Exercise:** **True or false:** a team that spends less than its cost budget three years in a row has shown that it runs efficiently. **Leo:** So what do I change in how we run the budget round? **Hanna:** Start with what you praise. Teams copy whatever gets applause. **Alex Tutor:** And with what you ask for. Ask for drivers and their owners, not for totals. > **Exercise:** Which practices make padding less likely in Klasna's next budget round? Select all that apply. ## Your turn: the note to support **Hanna:** I have to answer the support lead about the four coordinators. Help me write it so she doesn't feel accused. **Alex Tutor:** Numbers, the rule, and what happens if learners come in above plan. That last part is what makes people stop padding. **Sofia:** Then it's a note about how we'll decide, not just a cut. > **Exercise:** Write Hanna's note to the support lead (3–5 sentences). The facts: support asked for four coordinators in every month (48 coordinator-months); the rule, one coordinator at 38,000 UAH a month per started 400 active learners, gives 37 coordinator-months with the forecast's learners. Explain why the budget has 37 instead of 48, what that's worth, and what happens if learners come in above plan. > **Key ideas** > > - A top-down target says what the business needs; bottom-up detail says what it takes. Join them through drivers, not with an equal cut on every line. > - **Budget slack** hides in "just in case": here 418,000 UAH of extra coordinators and 310,000 of extra marketing, 728,000 in all, turned a 2,251,968 forecast into a 1,523,968 budget. > - Close the honest gap (748,032) by asking what would have to be true: about 3,995 more lessons at 187.25, or about 9.57 UAH more per lesson, or a lower target. > - Judge owners on their drivers and spending at actual volume; praising underspending teaches padding. > - Keep uncertainty in one visible reserve, not inside every line. **Alex Tutor:** September has just closed. Next time we put it next to the plan and take the difference apart. - Previous lesson: [Scenarios and sensitivity](https://productovi.com/courses/finance-for-product/scenarios-and-sensitivity.md) - Next lesson: [Case: plan vs actual by price, volume and mix](https://productovi.com/courses/finance-for-product/plan-vs-actual-case.md) --- Productovi Learning. Free, no sign-up needed to read.