24 Sep

Better and Faster Budgeting

At its heart, budgeting is an exercise in carefully allocating resources to ensure that a business maximizes its returns. As discussed in the last blog post, the allocation must be in alignment with the strategic plans of the company. Expenditure such as IT, marketing, capital expenditure and recruitment of staff should all be targeted at the strategic goals. At the same time, the board has to ensure that the budget works within the constraints of cash flow and that it allows for contingencies. It’s a big challenge to grow your company while managing the increased costs associated with that growth.

Think of your budget as a picture of the expected outturn rather than as a set of targets. Accuracy of forecasting is much more important than ‘beating the numbers’, especially when the latter can lead to number fudging. Focus on processes rather than departments, to encourage cross selling and avoid silo mentality. Look outwards at customers and competitors. Reward people on relative measures (e.g. performance against the competition) rather than simply beating an internally set number.

A lot of smaller companies have been busy improving their budgeting processes because of the level of uncertainty (and therefore risk) in all market sectors, partly because of the economic climate and partly because of the speed at which the Internet is driving change. At a time of such uncertainty you definitely want a better picture of what’s coming round the corner.

So good companies have made their whole forecasting and budgeting process quicker, more accurate and more efficient, i.e. faster, better and cheaper. In a recent survey, companies that showed an average 22% decrease in time to do their budget showed an 11% increase in profitability thereafter. This increase flowed from the heightened awareness of priorities, performance, and communication throughout the whole business.

Once the strategy and budget are in place, and they’ve been clearly communicated to everyone, then the focus will be on measuring performance against your strategic goals and objectives throughout the year. Many companies are now using not just financial performance measures but also qualitative criteria i.e. it’s not just the numbers being measured but also things such as customer service, competitive activity and staff productivity.

A lot of these measures are incorporated into a regular report – monthly, weekly or even daily – as key performance indicators, or ‘KPIs’. It can be incredibly useful for a business to have a one-page report that shows the KPIs and for the MD and board these are the metrics that run to the core of the strategy. Each department manager can also have their own KPIs and one-pager.

Of course, it’s essential that the reports show variances against budget and give a view of emerging trends. Many companies have some form of ‘dashboard’ or scorecard to show the one pager; these days it will normally be accessible on the web. For larger companies there is software available that automates and displays this information but it’s expensive. There are less complicated methods available for SMEs.

The best companies also assess operational and financial performance and risks on a continuous basis, giving them the ability to rapidly update their forecasts. I will discuss the mechanics of this in the next post, but in short it revolves around using a flexible, rolling forecast rather than a rigid annual financial plan.