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Budgets That Work

Do you ever feel your company is like a big ship out on the ocean being tossed and turned with every market trend wave? If so, you may consider budgeting as a means to gain a bit more control. But caution — there is nothing worse than an ineffective, unrealistic or arbitrary static budget. With that said, an effective, realistic, group-created flexible budget can serve as a key enabler for a company to meet its stated profit targets. For a budget that works, follow these guidelines:

Designate accountability. A single person needs to take responsibility for the entire budget process. This person’s main function is to keep the budget process moving in a timely fashion to meet an ultimate agreed-upon target date.

Start at ground zero. Throw out any preconceived notions of what your company has achieved in the past. Budgets based upon small incremental improvements will ultimately stifle growth. Instead, begin your budgeting process with a vision of the ideal, regardless of past history.   Pretend you are starting a new company from scratch on January 1. What would it look like?

Communicate corporate goals. If corporate strategy includes significant new projects, that is the first piece that needs to be built into the budget and communicated to the person in charge of the budget to communicate to the rest of the folks involved in the budget. For instance, if your corporate plans include building six new stores in the year 2000, that information is critical for accurate revenue and expense forecasts.

Begin the budget with revenue projections. The scope of your revenue projections will impact capital spending and all operating expense line items. Ideally, revenue projections should come from every sales person and every site. Bear in mind the impact of corporate strategy, however, on revenue. For example, if the company is planning reimaging of a certain store, this information needs to be communicated to the store manager for consideration in the revenue projection for the site.

Consider the impact of sales department optimism.   One of the best qualities of sales persons is their exuberant optimism. We don’t want to squash this enthusiasm in the budget process, but we may need to temper overly optimistic forecasts. Some companies handle this using a two-prong budget approach where the optimistic projections go directly into an aggressive budget that is only used internally, but not shared with folks outside of the company. Bankers, creditors, etc. are must be provided with a conservative budget.

Come to consensus on the revenues before budgeting operating costs and capital spending. The company’s revenue targets will obviously drive the expenses. Have complete buy-in to the total revenue and each of its components before attempting the expenses.

When it comes to expenses, have those persons with the most knowledge provide the data.   If you are budgeting fleet expenses, for example, the fleet manager should be providing those numbers, not someone in the accounting department. By using this bottom-up approach to budgeting, you will have more accurate expenses as well as ownership and accountability for the budget numbers.

Compile the expenses, then test the net profit results for fit with corporate profit goals. Since you are gathering expense information from autonomous departments, you may find that the first pass at the budget does not produce the company’s target profit. Since revenue was reached by consensus, you must reduce expenses. To do this, share the preliminary budget with everyone involved in the expense forecasts, and ask that they all trim their forecasts best they can. Do not designate a percentage, or set department targets. Instead, let each area see what they can do to get leaner.

Get commitment to the final budget. This should be easy if you’ve used the bottom-up process. It will be difficult if upper management has forced projections on any individual or department.

Celebrate the completed budget. A company’s first budget is a bit like giving birth, extremely painful but there’s a joyous sense of relief when it’s over with. Allow for a small celebration at the completion of your first budget.

Monitor and modify the budget monthly. Particularly the first time you ever budget, you will likely miss the mark. Based upon the company’s actual results compared with budget, the budget should be adjusted regularly. Any time revenue is under budget, it is critical to reduce budgeted expenses. There should be no pride in meeting budgeted expenses when revenues are down. On the other hand, if revenues grow faster than projected, the expense budget will need to be expanded to support the growth. Remember it is the company’s bottom line that really counts. Be sure that the results are shared with everyone in the budget process and ideally, with every employee.

In summary, budgeting can have painful beginnings, but if you take an ongoing, dynamic approach, accuracy will drastically improve over time. After a few years of budgeting, your company will experience very few surprises. Budget accuracy will allow you to manage your business processes smoothly, anticipate cash flow and capital spending requirements, and provide tight controls. Although you still won’t be able to turn the Queen Mary on a dime, you’ll have the early warnings when you need to turn the wheel, allowing you to have the ship turned by the time that turn is needed.

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