|Budgeting serves as your company's benchmark
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Budgeting time is often greeted with moans, groans, rolled eyes and sighs, but it doesn't have to be an angst-inducing exercise. By including the input of frontline managers, focusing on key business drivers and linking the budget to your business plan, it can be a roadmap for business growth.
The key to budgeting is to keep it simple. Though technically budgeting and forecasting are not the same, they are often used together.
"A forecast is a presentation of events most likely to occur and generally includes financial statements and footnotes," says Howard McMurrian, director in charge of consulting and technology at the Leading Edge accounting firm of Postlethwaite & Netterville in Baton Rouge, La. "A projection is a what-if presentation. Certainly you expect a budget to outline the most likely set of events, which is why budgeting and forecasting are so closely linked."
Budgeting serves as a benchmark for a company. But the only way to get employees on board is to first get their input.
Depending on your organization's size, you may start at the top and work your way down the organization in the budgeting process. However, that approach is often backwards. It's more helpful to start the budgeting process at the departmental level.
"Many business owners believe that a budget is cast in concrete, but it's not," says Gary Corum, shareholder at the Leading Edge accounting firm of Clark Nuber PC in Seattle, Wash. "The thing to remember is if you vary from a benchmark, follow up by asking the reasons for that variation."
A good budget is forecasted one quarter out and is regularly updated, according to Corum. "I think many businesses get too detailed in the budgeting process. You have certain fixed expenses, such as rent. You need to spend more time on major drivers of your business."
However, McMurrian adds that the nature of the budgeting process also depends largely on the nature of the business. "The budget process must be reflective of the business model and business plan. The plan is a roadmap from point A to point B. A budget serves as the driving directions for that plan," he says.
And while the budget should be revisited on a periodic basis, McMurrian cautions against revising too often. "If your sales are low, you don't want to reduce expectations for the sales staff. Rather, you probably want to hold their feet to the fire. It's not helpful to revise the budget because you are not getting the desired performance," he says.
Typically budgets are carried out by the financial arm of the business—the chief financial officer, an outside accounting firm or, in the case of many small businesses, the owners.
Most budgets are done by looking at last year's numbers and determining whether or not you can improve upon those numbers. As an organization becomes more sophisticated it's important to get input from department and frontline managers. A vague statement that sales will increase 7 percent is not meaningful. But employees who can communicate anticipated sales changes in current customers (through price increases or new product sales) and articulate the source of expected new customers represents the thinking you need.
Perhaps by pushing down the process to the appropriate departments in a larger organization you can get more detailed budget numbers.