Departmental Budgets

Roy Lobenhofer

I now consider myself very lucky my first experience as a department head involved departmental budgets. It was most likely the best education I had in how to run a department for a business. But, I’m puzzled that it was my last experience with them in foundries.

Why Budgets

At the time, I was working for James B. Clow, a pipe foundry. Through a series of circumstances, I was in charge of the metallurgy, laboratory, and melting long before I would normally have been considered for such responsibility, but I muddled through.

The former plant metallurgist told me nothing about budget meetings. (I gathered from conversations, he didn’t take them very seriously. I wouldn’t be surprised if that was not one of the reasons I became plant metallurgist.) My degree was in metallurgical engineering and there was nothing in that educational experience to help handling budget meetings. To say I went in blind is doing a disservice to the unsighted. I went in dumb!

I remember the first such meeting. The month had not been particularly good. We’d lost some production days for some reason; therefore, our costs were over budget. It was, for me, a very uncomfortable meeting. I had the feeling it was the Plant Accountant, Manager, and Superintendent against me and they had numbers showing how badly I was running things. I knew the problem was mainly the lost days (I think they did too), but I didn’t know how to argue with their numbers.

What surprised me was the next month we had a very good month and were well under budget. I had looked at the bottom line and expected a very easy budget meeting. Wrong! There were a couple of line items over budget and they expected me to know why.

That became the pattern. There were months when the bottom line wasn’t good and they expected me to know why. There were months when the bottom line looked good but there were some line items weren’t and they expected me to know why. There were even times when they noticed I was significantly under budget on some line item or other and they expected me to know why.

The above reads like the budget meetings were “Pick on Roy Parties.” If that was the case, why would I think budgets are such a good idea?

It didn’t take me long to learn some valuable lessons from the budgeting experience and I made the meetings a chance to show off a little. The lessons made me a better manager throughout my career, but, more importantly to Clow, a more productive employee for them. I’m sure the following is not comprehensive, but here’s a list of some things I learned from the budgeting experience.

1) We’re not there to make pipe/castings; we’re there to make money.

It’s so very easy to get involved in the nuances of operations and forget if profits aren’t being made, we aren’t going to have jobs long. Engineer types, like me, love the details of processes and strive to make things perfect. At times, in that effort, we forget the cost of missing “perfect” is not as much as the cost of achieving it. The monthly budget meeting provided reality checks for my efforts to “guild lilies.”

2) It’s hard to solve problems you don’t know about.

It didn’t take too long for me to realize if I knew why things were over budget the questioning was far less intense. We were always given the budget results before the meeting. After a couple of months, I could scan the numbers and know what I was going to be asked. A few minutes digging before the meeting usually provided me with reasonable explanations. In the cases it didn’t, I knew there was a problem and could start working on a plan to fix it. There were also those times when the digging revealed an easily solved problem.

3) Knowing how the game is scored is very important if you want to win.

Most of us are competitive to one degree or another. For a long time, I looked at winning in my career as making myself more promotable. As the “bosses,” in most cases, wouldn’t understand the specifics of the technical challenges I faced, the budgets taught me how to translate those successes into economic/budget terminology. Reporting my successes in those terms, earned me far more “atta boy”s than I would have gotten if I reported them in a technical way. Dollars saved is something every boss understands, especially if it shows up in the budget.

4) Management is happier when you are under budget.

Initially, it felt to me the budget meetings were a modern day inquisition. No matter whether the bottom line was good or bad, I was getting grilled. But, it didn’t take too long for me to realize the grilling was far less intense when the bottom line was good. (See, I’m not as dumb as I look!) The questions about line items were still asked, but there certainly wasn’t the intensity when the overall was looking good. Thus, I learned the obvious lesson: “Keeping costs under budget makes for a happy boss!”

5) Have an ace in the hole when new budgets are made.

The lesson above led me to another trick/lesson. Part of the budgeting process is preparing the next budget. At Clow, the accountant came around prior to the new fiscal year to ask for input. It was pretty simple, he’d tell me he had already factored in inflation, but was there anything else that I expected to be different in the next year. He was looking for changes in the process or bigger items (replacing a coil on a furnace, spectrometer, or the like.)

I would tell him about any big replacements I saw coming, if any, but the process was always going to be the same. Even though I knew it wasn’t going to be the same. Knowing the “bosses” were much happier when the bottom line was under budget, I always kept a list of projects/changes I wanted to try I thought would reduce costs. I’ll confess to being less than an ideal employee because I’d rarely tell my boss about the ideas/projects; however, I’d found out early “need to know” wasn’t just good for the CIA. If I told the boss about an idea before really trying it out and it didn’t work, I’d lose some of my “atta boys.” On the other hand, if I didn’t tell them about it until I was sure it worked, and it did, I’d get the “atta boy” without the danger of losing any.

6) Little things do make a difference, but you really have to watch the big ones.

It was the questions about the line items that led me to what I consider the most important revelation about foundry costs/budgets.

One of the line items in my budget was “refractories.” It was kept fairly well in line, but our shop was right by O’Hare airport. I still believe every refractory salesman who was early for a flight or came in too late to see anyone else tried to see me. Every one of them had a way for me to save money. One year, I decided to make reducing my refractory costs a priority.

It worked. My refractory costs were down. In my everlasting search for ‘atta boys’, I decided to summarize my efforts in dollars and cents for the next budget meeting. I added up the savings and it was a nice number, but I then took it another step. I calculated how much savings that was for every ton of pipe we made. Since this was before computers (electronic calculators, too), I was afraid my pencil was going to run out of lead from writing all the zeros before I got to meaningful numbers. It was a nice saving but in terms of impact on the cost of our product it was really negligible at best.

From that time on, I made lists of the things I wanted to try. As part of that list, was my estimate of how much could be saved over time. As a metallurgist, I had the opportunity to do things with the metal which impacted costs far more significantly than the work on refractories I did.

Why Not

With departmental budgets teaching so much why did I never see them again? That question has bothered me for years. Obviously, I haven’t been in close enough contact with all foundries to know if Clow is/was the only one using budgets. I doubt that. On the other hand, I have had close contact with many foundries since then and have yet to find one that did.

I have asked a few foundries owners/CEOs about it and I never got an answer that satisfied me. There were some that mumbled something about never having thought about it and they would. I also remember at least one telling me he didn’t want their employees knowing that much about costs. I certainly hope that was not a common reason. If a foundry doesn’t want its management personnel knowing about costs, I’d be willing to bet their costs are really high!

From those conversations with bosses and my observations over the years, I believe the lack of departmental budgets is almost a cultural thing, especially with small foundries.

Small foundries were frequently started years ago by someone who had the rare combination of knowing how to make castings and sell them. When they started, there was no need for department budgets, because that someone ran everything and knew what everything cost down to the penny. As the foundry grew, the entrepreneur no longer had the time to keep the books, make and sell the castings; therefore, accounting staff was hired. It’s my impression, their function was to write the checks (the boss stilled signed them) and make sure the tax and other reports were filled out properly. But, the Boss still had a good handle on what was what when it came to costs.

If the Boss did indeed know what was what about costs plus making and selling castings, the foundry continued to grow. Finally, it was time for someone else to take over the foundry, either a family member or someone who bought it. Some of the cost knowledge was lost then but even if it weren’t for the change at the top, growth would have led to diminished knowledge simply because of the numbers. After all, even the best juggler can only keep so many balls in the air at once.

That would have been the ideal time to think about departmental budgets, but there were two things holding them back. The most significant was it had never been done before. When it comes to running foundries, if the evidence a new way of doing something is less than a hand written message on the wall from God, it’s going to face a hard sell. Grandpa didn’t need department budgets, why do I? (Grandpa had 5 employees. You now have 150!)

The other thing holding budgeting back is they are hard work for the Boss and the accounting department. Especially getting it started! I suppose there are about as many ways of coming up with budgets as there are accountants. I know when I tried to set one up one for one of the foundries I worked with I came up with three or four ways. (By the way, my boss shot the whole idea down before I got very far.)

As I said the budgeting was in process at Clow before I became involved. I can’t imagine the initial budget was too much like what I saw. I picture numerous changes before getting to the one I saw and there were parts of that one I didn’t think was very good. There’s no doubt setting up a budget system still takes a lot of hard work, but on the bright side, computers have made it far easier to do the reports and make changes.

I guess it boils down to the question is the work coming up with a budget going to be compensated for by having department heads learn the lessons I did.

As always, I welcome your thoughts/comments on this or any other essay. rwl@lobenhofer.com

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