7 Tips: Rethinking your Budgeting Process
With the start of the new financial year, discussions will soon turn to the 2018 budget (if they haven’t started already). What’s your immediate reaction? How does your team feel? Disinterest? Frustration? Exhaustion?
Too often the response to a new budget is a negative one; caused by the process through which it is developed, the use of the budget throughout the period (or lack thereof), and the level of staff engagement in its development.
If you think your budgeting process could do with a refresh, here are our top tips for developing a budget process that will add value to your business:
1. Consider the role of your budget in the planning & monitoring process
A budget has considerable value when it sits within a broader planning and monitoring process. It is very difficult to determine whether your growth strategy is effective or on track without a reference point. There is much research that supports the increased likelihood of achieving goals by writing them down. Historical and anticipated performance to budget should be considered whenever you are assessing your business’s periodic performance. You should also consider whether a rolling, multi-year budget would better serve your business. This can better focus the attention on the long term over the short term. Appropriate times should be set to review key assumptions and update the document where necessary. There needs to be a process to ensure all parties are accountable for achieving your business’s long term success.
2. Where are you investing your most precious resources?
If you think this is cash, you are wrong. Access to cash has rarely been more available and the cost of debt and equity is close to all-time lows. Your team’s time, talent & energy are your business’s most valuable assets. Where you choose to allocate them will play a huge role in your company’s future success. Your budget needs to allow sufficient time for staff to improve internal processes, generate leads and develop new services that will meet current & future needs.
3. Is it consistent?
Your budget needs to be consistent with your business goals, non-financial KPI targets, and expected outcomes of new marketing initiatives etc. Without this, there will be mixed messages for your staff on what is expected and frustration will come from different perceptions of the same outcome caused by different benchmarks. Ensuring this consistency requires an added investment in time, but this could be the difference that makes the whole process worthwhile.
4. What does this all mean for cashflow?
Let’s not forget the importance of cashflow over profitability. You must understand the cashflow implications presented by the budget, particularly if there are any pinch points that could be avoided with some adjustments to the timing of discretionary spending or investments. Stress test it. Consider outcomes beyond a single periodic result. What will it mean if debtor days blow out and you have a bad run of weather?
5. Keep it high level
Yes, you might use more blue pens this year, but your key staff do not have time to consider such matters. Keep your discussions focused on the key areas you will invest in that will determine its future success. While cost control is an important process for any business, it is also unlikely these savings will be deciding factors in your business achieving its long-term goals.
6. Include visuals
It is not easy to quickly identify trends and issues within financial reports, particularly for those without much financial background. Consider including some charting that highlights the core assumptions and projections within your budget. You may be able to leverage your accounting software or add-ins to assist with this.
7. Finally, consider renaming it something other than a budget
Too often the negative connotations discourage engagement in this process. Call it a forecast, financial plan, anything you think encourages a positive mindset.
Like most things, the value you get out of your budget process will be reflective of what you put in and the mindset you approach it with. Some slight changes to how you approach budgeting process can significantly increase its value to your business.
If you would like more information about rethinking your business' budgeting process, you can contact David Edmunds here or call us on 1300 743 267.