Advantages of business budgeting

All organisations need a financial blueprint to help them manage their revenues and costs on a continuing basis, and most companies prepare some form of a plan that covers their next financial year. Many employees, even those in finance, often view the budgeting process as a chore that gets in the way of them doing their ‘proper’ job. It doesn’t have to be like this!

This is the first of a pair of blogs in which I am going to discuss how the budgeting process can be made much more valuable and interesting to everyone involved, so that it earns appreciation and buy-in rather than indifference.

If you see budgeting as a chore, then read on…Make it about more than just the numbers. The financial budget (or forecast) is only one element of the company’s strategic planning. Your strategy determines your goals and objectives and the numbers should be aligned with them. Avoid making the budget the ‘main thing’ or it becomes a straightjacket. Too many companies have budgets that are virtually isolated from strategic goals.

Have a budget that covers many KPI's
Have a budget that covers many KPI’s

The solution?

Involve the right people, throughout the company, and have an open culture so that everyone is motivated because they will each have responsibility for their own inputs and results.

Have several measures of performance other than the purely financial numbers in the budget. For example: customer service, staff productivity, competitor pricing, delivery times, product quality, complaints – all measures that give you a much bigger picture of real performance.

Ask yourself whether the budgeted result is a target or is it a forecast of expectations? The latter is more flexible and more realistic, and helps to free up people’s thinking.

Assess all managers on delivery of goals not on meeting numbers.

Ensure that the forecasting process is effective, that there is good communication and training, and there is always help available to answer questions.

Use a forecast that is always looking more than 12 months ahead; for example, a company could have a 15-month ‘rolling’ forecast. This gives you constant visibility beyond the current year and reduces the obsession with the ‘year-end’.

Regularly report all performance measures in a clear format. Include ‘dashboard’ style key indicators relevant to each employee. The report will show both the financial and non-financial measures.

The company monitors variances and trends, and adjusts accordingly to ensure that its objectives are on track and still appropriate.

Finally, ensure you have a strategy in place! Even just a basic one of how you intend to differentiate your product or service from the competition, so that a customer can understand the value you are offering.

To quote Peter Drucker: ‘Management by objectives works if you first think through your objectives. Ninety per cent of the time you have not’.

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