The Managerial Power of a Budget

The Managerial Power of a Budget

May 23rd, 2018 // 2:53 pm @

The budget and the process that creates it can be one of the most powerful business tools a company has, but it is too often seen as an administrative process that holds no power to influence how a company develops, and is treated accordingly.

The budget can turn a strategy into a working operational plan, with targets, allocation of resources and has the ability to focus and motivate the whole company.

Building a budget properly is a time consuming but worthwhile process and should involve as much of the management of the company as practical.

The starting point for a good budget is an effective strategy, which needs to start with how the board wishes to add shareholder value. I have worked in companies where adding value meant making profit; I have also run companies where revenue growth was the goal, as the business value was driven as a multiple of revenue. I have even worked in situations on the run up to an IPO where being seen as market leader had the major effect on the share price.

The strategy needs developed into specific targets for each part of the business in conjunction between the board and the executive.

To actually build a budget Excel is your best friend, and budgets need built normally in three specific sections, revenue, direct costs (people) and indirect costs. Each linked so as you change one part it flows through to a final executive summary.

Revenue is often the most difficult part of any budget and it is easy to just put in a revenue line that you desire. There is within Boards and Executive teams a dangerous tendency to believe that because it is in the budget it will happen.

The revenue line needs built from key assumptions, such as number of salespeople, average sales per month, number of orders, average order size, pricing etc. Whatever are the right key drivers for your business? This allows a review to check whether the assumptions behind the revenue projection make common sense, and represent reasonable goals and is therefore likely to happen.

The direct people costs are a simple mathematical spreadsheet of types of people, average salary, NI, Bonuses etc. The two keys are, to build in the right number of people, if one intends to install twice as many units as last year, one will need twice as many installers or to make an assumption that your present team can install more per day?

The second key to budgeting people is timing, people take time to recruit, time to train, and time to get up to speed, and these issues need incorporated in the budget process. Also people will leave and for many companies this comes as a surprise, it is however a fact of life. I had a great sales manager who had a headcount of 40, and when someone left he recruited, which with recruitment time, training and ramp up meant he was consistently running with less than the 40 sales people he needed to achieve his budget. And at the year-end his average headcount was well below 40, and sales suffered accordingly. With development he started recruiting to over 40 people on occasions but aiming to have the 40 as a yearly average, and the sales budget was achieved.

Many companies I have seen spend the entire year running below the very headcount they have decided was correct to efficiently run their business, because of a failure to budget for turnover, training and ramp up.

Indirect costs are the easiest part of the budget process in most cases, but need to be built from a blank start each year, it is too easy to just add 5% to last year and be done. Good companies review every line of indirect costs every year; any savings in this area fall straight through to profit.

Once you have the base budget with its three parts in a spreadsheet one can experiment with the key drives, number of people, pricing, sales efficiency, whatever the key drivers of your business to see the effect of changes. And this allows experimentation to find the optimum plan.

The budget needs built ground up, and from as far down in the business as possible. The more junior managers have probably the most practical handle on what is really required to achieve the company goals, and their involvement is likely to give you their buy in.

Once you have an agreed budget, which normally takes a few attempts, the critical issue is to break it down into targets as far down the business as possible. If people’s targets add up to you achieving your budget, your chances of achieving the budget goals are much higher.

A well-constructed ground up budget forms a great basis for an ongoing forecast; by simply inserting actual’s into the budget as the year progress’s you can see how the business is progressing, and whether your key assumptions are accurate or need amended.

Taking the time to construct a proper budget from the ground up with thought through key assumptions, and then using this to set targets through the business will set you up for success.


Category : Blog &Management Technique

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