Budget Planning And Protecting The Financial Health Of Your Business
Every business, no matter what size or sector, will engage in some form of budgeting to plan what needs to be achieved and, most importantly, to assess what the business can achieve.
Whilst current economic conditions and factors external to the business can make budgeting and forecast scenario planning more challenging, it goes without saying that budgeting deserves full attention and focus from all key stakeholders involved in the growth and success of your organisation.
The Importance Of Budgeting
A budget provides a forward-looking overview of both the current state of your finances (including income and expenses) and your long-term financial goals. Your budget will be critical in making sound financial decisions across all areas of the business.
Having been involved in budget cycles for various organisations, I am well versed on why good budgeting is so important, what steps organisations should follow in the budget process, and the many benefits that can be realised from a sound budgeting process.
Understanding the value of good budgeting for your business and the key steps to achieve this, will provide valuable insights for any organisation that is new to budgeting, or perhaps seeking to improve their budgeting process.
The Budget Process
A budget should cover the full Income Statement: revenue, cost of sales, gross profit, overheads, net profit, and taxation. The budget should also consider cash flow – there’s no sense in having revenue growth in your budget if it’s not factored in a positive cash flow.
Do not forget to budget for Capital Expenditure. This can be a significant area of any organisation’s cash outflows and must be included in the budget.
The budget process can easily be broken down into six key steps, which will involve both planning ahead, as well as reviewing historical information to recognise where you are now and where you are going.
1. Plan The Budget Cycle
I cannot stress enough how important it is to plan the budget cycle. Start early, plan ahead, and set deadlines for draft budgets to be reviewed. Typically, those involved in the budgeting process have their day job too, so communicating deadlines to team members and giving plenty notice of the deadlines, is essential to keep the budget cycle on track
2. Start With Your Current Operational Plans, Schedules & Financial Results
The best sources of information for budget preparation are all around the organisation and beyond.
There are several documents that are key when preparing a budget. These are:
- Business Plan
- Operational Planning Schedules
- Historical Financial Results
Kick off with these documents and determine the operations that are driving the budget, and support the strategic goals and objectives of the business. Don’t simply take last year’s results and assume 5% increment across the financials – business is rarely that easy.
Consider external factors that will influence the budget. For example, oil price fluctuations, Brexit, change in government policies, and market developments, such as new entrants or mergers and acquisitions
3. Factor In Your Growth Strategy
Most organisations aim to grow, or at the very least maintain their revenue base. Think carefully about how growth can be achieved. Do new markets need to be developed? Or new customers? Or selling more to current customers?
4. Get The Right People And Information Into The Discussion
Budgeting can be simple, but it can also be complex depending on the individuals and information brought into the mix. Use one version of the operational plan. Do not have multiple versions that can cause confusion and uncertainty between users and departments.
Get the key people involved in the budget. For example, accountants are the ideal people to develop budgets, but they also require input from operations-based individuals. We all have our core skills and knowledge. Put these to good use during the budget cycle.
5. Make Use Of Proper Budgeting Tools
Utilise software that makes budgeting easy. Most accounting software has a built-in budgeting tool, so there are other options aside from excel. You should have easy access to historical results for prior years, which will make the budget process much more efficient. Let your software do the work for you!
6. Work Bottom-Up And Top-Down >>> Meet In The Middle
A budget dictated downwards by senior management is unlikely to be effective. Likewise, departmental budgets that are consolidated at company level are highly likely to be over-optimistic and unachievable. Usually, every department wants more than is available.
The budget process should be overseen by senior management who are closer to the organisation’s strategic goal during the cycle, with the budget being delivered by the departments in the organisation. Then, during the review process, the budget is aligned to key markets, funds available, and the most profitable opportunities.
Benefits Of Budgeting
Planning your budget objectives and implementing a budget cycle with key deadlines is an important part of the process. Preparing a budget properly will ultimately result in a number of benefits for your organisation.
- Your Organisation Can Clearly See Its Financial Goals
You know where you are and where you want to get to in the budget period. However, the budget goals must be consistent with the strategic plan and direction of your organisation.
2. Meet Operational Objectives
The budget acts as a performance tool to ensure that operational goals and objectives are being worked towards and achieved. Resources are allocated in a defined, prescriptive manner to support the achievement of pre-established objectives.
3. New Project Development Resulting From Well-Managed Capital
Budgets highlight key areas of project development and improvement. Aggregated budget information will identify best use of capital resources, resulting in best value return on investment by analysing your initial and final value from capital expenditure.
4. Improve Your Decision-Making
Your budget should act as a guide and keep your business on the right pathway to growth and success. When inter-departmental conflicts arise, the budget will aid efficient communication and enhance transparency, preventing unexpected situations and improving management decisions.
5. Performance Measurement
One of the significant benefits from preparing a budget is being able to critically evaluate performance across the organisation. Evaluation will inevitably lead to performance review and identification of areas of the organisation that are profitable and areas of the business that need to improve.
6. Future Planning
Creating a budget and rolling forecasts will support the changes that you want to bring to your business. A defined budget will identify the highest-value business priorities and can easily be shared with employees and other stakeholders for greater transparency, increased feedback, and improved communication.
7. Investor Confidence
Investors in an organisation are continually seeking assurance that the organisation is on the right track, and that their funds are being properly utilised and in operations that are consistent with the vision and objectives of the organisation. A detailed budget that can be openly shared with investors is key to adding confidence.
Summary
Preparing a budget should be seen as a positive exercise for your organisation given the significant benefits that can be realised. Don’t see it as an onerous task, rather consider your budget process as an extremely valuable business planning tool. See your budget as a transformational exercise that will improve financial performance and decision-making, and act as a framework for business growth.
Through improved collaboration, communication and data management, your business will be ready to implement those projects that will really make a difference to the bottom line of your organisation.
For further advice or assistance with your budget planning, get in touch with us at info@nkyconsulting.co.uk