The concept of planning is central to business. Everything from production runs to capital construction projects to customer acquisition campaigns have plans associated with them. A budget is, simply put, a financial plan. So just like other areas, a budget is there to help us run the business more easily and efficiently by making important decisions as early as possible.
When I think of things at a very rudimentary level, there are three steps to planning a sound budget:
- Confirm the strategic goal for your business
- Collect the requirements to achieve this goal from your business
- Collate and review the overall budget
Knowing what you are aiming for is essential when starting to devise a budget. It is important that your executive team are able to clearly communicate to the business what the target is, and how they plan on getting there. It needs to be something as clear as “increase sales by 20 percent next year,” or “improve earnings before interest and tax (EBIT) by 25 percent over the next three years.” These goals should be flowing directly from the organization’s strategic plans.
Getting input from the business on how the budget can help achieve strategic goals is essential, as it allows input from people who have first-hand knowledge of what is happening. In reality of course, this knowledge will be a long way from the financial budget models that are being requested, so the trick is to use budget templates as much as possible. Department managers will need to enter into the template projections for revenues and expenses to reflect forecast budget outlays, the number of units they expect to sell, when and at what prices. The template can then do the translation into the required budget structure.
You can use IFS Business Analytics to define budget templates, collect budget data and collate this into an annual budget.
Now that you have the budget input, it needs to be developed into an overall business budget before being reviewed by your executive team. One thing that I believe is important for you to retain is the non-financial data that departmental managers have provided to you. This allows sensibility checking by your executives. It is much easier to understand that we plan to sell an extra 10,000 units of a product than to say we will magically go from sales of 1,000,000 to sales of 1,200,000. Obviously there may need to be some adjustments here, but if there is a clear link to the strategic goals then this review should be as simple as possible.
Finally, a budget needs to be flexible. This sounds counter-intuitive, but imagine what happens if you sell a lot more than planned. Without adequate flexibility, you would automatically assume that’s a good thing. But if those extra units sold all generate a negative margin, then you need to be aware of that. Or if you have allocated budget for work performed by a contractor on a capital equipment project, but the invoices are either more than budgeted or are being pushed into a later reporting period, you need to know that so you can make the appropriate adjustments in the forecast. That is one reason you need real time visibility into what is going on with expenditures and revenues.
What other factors do you take into consideration when setting up your budgets? How early do you begin to finalize your budget each year? Where are you with the 2014 budget cycle? I look forward to your thoughts.