Budget Reallocation When Every Unit Claims Priority
A mid-sized manufacturer faces a 9% budget reduction next year, about $7.2M. Three unit leaders have submitted business cases: Operations wants $4M for automation with a 26-month payback; Sales wants $2.5M for a new CRM with claimed 18-month payback but no pilot data; R&D wants $1.8M to continue a product line with two committed customer contracts. The CFO notes the cases use inconsistent assumptions and that the total requested exceeds the reduction target. The CEO wants a decision in three weeks. One board member is a former automation vendor executive.
1. What decision process should the CFO run to allocate the reduction fairly and defensibly?
Read the worked answer
The CFO should impose a common evaluation framework before comparing cases. Steps:
- Normalize assumptions: same discount rate, payback definition, and risk treatment across all three cases; require evidence quality ratings (pilot data versus claims).
- Score each case on strategic fit, financial return, risk, and reversibility, and require that any case above a threshold be funded only if it beats the reduction target net of cuts.
- Separate must-fund obligations (the two committed R&D contracts carry penalty exposure) from discretionary bets.
- Stress-test the Sales case given no pilot data; treat its 18-month payback as unverified.
- Manage the conflict: the board member with vendor ties should recuse from scoring and voting on the automation case.
This produces a decision the CEO can defend to the board and avoids comparing incomparable numbers.
2. Given the constraints, propose a funding allocation and justify the trade-offs.
Read the worked answer
A defensible allocation within the $7.2M reduction: fund the R&D contracts at $1.8M because breach penalties and customer trust outweigh the savings; fund Operations automation at a reduced $2.8M phased to the highest-return lines, preserving most of the payback case while lowering near-term cash; defer the CRM to a $0.4M pilot with defined success metrics before the remaining $2.1M is released. That spends $5.0M and leaves $2.2M of the reduction to be met through operating cuts identified by each unit.
Trade-offs: Sales gets less than requested and must prove the payback with pilot data; Operations absorbs phasing risk; R&D is protected on contractual grounds. The CFO should document that the Sales payback was unverified, that the automation case was discounted for evidence and conflict-of-interest concerns, and set a 90-day review to release or cancel the deferred CRM funds.