An annual budget is like a map for the business. Miss the directions on the map and you may land up in places best left uncharted. But how do we ensure that the directions on the map are right in the first place? A lot of focus is given on the financial nitty-gritty of the budget and rightly so. But the best financial people can’t create a budget that can be met or exceeded unless business understands and creates the right environment for its success.
Through my experience in creating, tracking and reviewing budgets, I have found that it is important to have the following considerations in mind during the budgeting process to ensure that the final output is something that is realistic enough to not leave you scratching your head wondering what went wrong and where at the end of the financial year :
Consideration #1: What is your starting point? Often people use last year’s budget as a starting point and apply percentages for growth and inflation. In today’s market scenario, that is not a very wise thing to do. Check your run-off rate (orders in the bag or backlog) situation first and then the funnel. Determine the return on investment that you have made in previous year on new products and services that are likely to bear fruit to arrive at the stretch that is possible. Validate your assumptions against the market growth in your segment as well as the trends in the previous year to finally close on the plan for the next year.
Consideration #2: Do you know what your short-term (year ahead) AND long-term (3-5 years) goals are? While short-term goals for the year are usually determined by your management (could be you) or your investors based on the size of your company and you may not have much say in that, there has to be a built-in plan in your budget for the year(s) after that. What do you need to invest in now in order to ensure that your growth in the long-term is secured? This will have an impact on the margins target for the current year and hence an important consideration on where you want to allocate your available money in this year’s budget.
Consideration #3: Is your team ready and enthused? This by itself is the single most important factor that could make or break your budget in my view. Has the budget creation process been a participatory one with the key members of your team involved, engaged and aligned to the goals in the budget? Are they enabled enough to drive the growth or manage the costs as needed? Are they willing to collaborate and support each other to make the year a success? It all boils down to the culture that is prevalent in the organization – no budget can be met if your team is not ready.
Consideration #4: What is your Plan B? There has to be enough provisions in your budget to allow for changes midway if things don’t turn out as expected (Murphy’s law again – what can go wrong will go wrong). Also the budget should be created in such a way that it remains a “living” budget – to be able to move around a few allocations for investments areas and growth areas based on performance trends during the year without affecting the target business metrics.
Consideration #5: Are your systems and processes ready? Break down the budget into tasks with timelines, identifying the stakeholders best suited for each task, aligning existing processes and designing new processes and metrics to ensure sustainability IN ADVANCE. Assign accountability within the organization not just at the senior levels but right up to the front-line staff to ensure everyone knows and is signed up for the budget. This helps in providing a clear line of sight for achieving the budget while building confidence in the budget within the organization itself. Review your systems (including approval mechanisms and dashboards) to ensure that you have every tool you need to monitor the progress on your budget.
If we can incorporate the thinking above along with rigorous financial planning and analysis, I am confident that the budget would become an enabler to meeting the performance objectives rather than an obstacle as it is commonly perceived.
“Before you start some work, always ask yourself three questions – Why am I doing it, what the results might be and will I be successful. Only when you think deeply and find satisfactory answers to these questions, go ahead.” Chanakya (circa 370- 283 BC)
What factors do you consider when preparing your budgets? What tool or process do you think most helps in successful implementation of a budget? I would love to hear and learn from you.