Setting a budget is probably the least sexy part of running a company. It’s also the one thing that can make or break a business. There are several things managers need to do to get it right.
The first thing is to remember that a budget is just a forecast. No budget has ever delivered to the cent. The actuals can be totally different and there are times when budget numbers are way off the mark. What is the sign of a good budget? How close it gets to the actuals.
But how is this done? One step is to use the budget as part of the business planning cycle. Now, business plans consider more than just the financials. A business plan helps clarify whether the business is moving in the right direction. It looks at where the market is heading, whether the company has the right product mix and staff and what the competition is doing. The budget helps inform that process.
The budget needs to be done by the managing director along with the chief accountant or financial controller and any other relevant finance managers. But it needs to involve others, it has to be a team effort. If, for example, the company is planning to do some hiring, it needs to bring in HR people. If it is looking to invest in a particular piece of equipment, it should call in the plant manager. Operational people are crucial in the budget process – the number crunchers can’t do it by themselves.
Budget specialists say a top-down and bottom-up approach is required. Top-down starts with the managing director outlining what the objectives are and how much growth is required. The boss is putting a stake in the ground and bringing a strategic focus to the budget process. Bottom up is where the managers look at the revenues coming in and make budget forecasts.
Some companies head off on a retreat for a few days to talk about what needs to go into the budget. It is important to take people who are completely across what was spent last year, what’s recurring and what’s projected. Discussions away from the workspace allow fuller examination about what’s possible.
Intelligence gathering is a critical part of every budget process. Businesses need to know what competitors, customers, distributors and suppliers are doing to help them determine where to focus their budget efforts. This needs to be done three months before the budget planning process so that the information is ready to go once it starts.
Scenario planning is also important. This requires managers to look at what could affect the budget. Experts say a budget plan should have three scenarios: the expected case, a poorer case and Armageddon. Scenario planning looks at particular break points. What happens as the dollar breaks parity? How will the carbon tax affect the business? If the Coalition is elected, what impact would a change in workplace laws have? Ideally, every budget needs to have contingency plans built into it. Scenario planning helps with that.
Finally, a budget needs to be reviewed at least once a month. No budget should be set in stone because during the year, managers will need to make changes to deal with whatever comes up in the business environment.
Leon Gettler is a senior business journalist who writes for a range of leading newspapers and journals
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