Business owners and managers feel the need to prepare a budget, but very few actually appreciate the rationale behind the whole act of budgeting.
This was the main topic discussed by members at a recent meeting of the Business Exposure Group.
Should you have a formal business budgeting process, and ask yourselves why do we prepare budgets.
- To assist in planning
- Motivate and measure staff
- To plan changes to your business / changes to your marketplace
- Create objectives for the year and KPI’s
- Address issues and problems
- Provide financial forecasts
- Consider investment requirements
However, if you have a mature business is there any point in budgeting when it will be much the same as last year. A budget is not a forecast. A forecast is a prediction of the future, whereas a budget is a planned outcome of the future. Members were in two minds regarding the value of formal budgets.
A budget should be an ongoing process, not just a once a year routine. Research shows that 87% of budgets are not used in reality, so is time spent preparing worth it?
Perhaps it’s better to always discuss financial decisions with your team. Ask …
- Does this align with our culture
- Is there another solution which is better for our customers, even if more expensive
- Is there something less expensive that provides the same value
- Is the timing right
- Do we really need to make this expenditure at all
- What is the worst that could happen
Getting the employees acceptance of the budget is important.
- When setting targets should they be aggressively challenging or easy to achieve?
- What you don’t want is budget padding where some people introduce slack so their budget can be easily achieved
- Setting high targets can result in loss of staff motivation
- Allow staff to have some input of what they are measured on
Structured planning is the answer to improve profits, reduce costs and increase ROI. Don’t allow yourself to get bogged down in the day to day problems of the business, make time to look at the bigger picture.
An important consideration when planning your budget is to allow room for flexibility, as quite often brilliant ideas and projects come up which have not been factored into the original budget, and it would be wrong to discount the opportunities.
Be prepared to make changes to the budget as the year progresses; if money needs to be reassigned then don’t be afraid to alter it. Budgets can be flexible.
One of the members of the Business Exposure Group stated ‘We abandoned the traditional budget. We believe sound business decisions should be based on what’s best for our employees, our customers, our operation and whether the decisions will help us in the future – not on a budget’.
When setting budgets the members suggested taking into account the following.
- Rolling 5 quarter forecasts eliminate the distortion caused by having financial incentives to meet a fixed target for a single financial year?
- 13 week cash flows are better and easier to keep updated to the ebb and flow of your business and provide a better picture of reality to make business decisions?
- A budget really helps you do a better job of belt tightening during recent difficult trading
- Resource allocation should be about putting funds behind the right high value opportunities.
Our members left the meeting with lots of new ideas to put into practice in their own businesses.