Budgeting process a vehicle to improve business results

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In our experiences, many businesses - both big and small - fall into one of the following traps:

• Driving blindfolded. No formal budgets are prepared and everything is left to chance.
  
• Promoting bureaucratic secret societies. A formal three month budgeting process is followed, but there is no clear outcome - at least not for those people that are expected to execute against the plan.
  
• Living a fantasy. People spend significant time preparing detailed input for the budgeting process, but when the results are not satisfactory, numbers are simply manipulated until the 'right' answer appears. As much as stretch targets are useful for bringing out the best in people, unrealistic expectations that are not based on solid assumptions switch people off and will leave them disengaged and demotivated.

Although there are many pitfalls, it is very possible to beat the budget blues. This does not mean that a budget process should be taken lightly and that it should be over simplified, but getting back to basics is the best place to start building a sound foundation.

1. Use a zero base approach when it comes to costs. Do not simply take the previous year's costs and add a percentage to cover inflation. Each expense item should be considered from a zero base and should only be included if it is justified. By doing this you will avoid the risk that outdated expense lines are simply carried forward year after year without being relevant any more.
   
2. Learn from the past. Analyse what happened during the previous year by comparing actual expenditure or income against the previous budget. Identify unusual items and try to determine whether they would be recurring in future budget periods. Take time to understand any variances between actual and budgetary figures and take this into consideration during the next budget process.
   
3. Align with your strategy. Link your budget to your business strategy. If you budget for capital expenditure to achieve capacity increases, make sure that it is pulled through into your income and expenditure projections. The business strategy and budget should tell a single story and not contradict each other.
   
4. Complete preparations early. Complete your annual supplier negotiations prior to the budget cycle, so that cost information is current and so that you can avoid unpleasant surprises in the new financial year. Also start other preparations early to avoid a last minute rush that might increase the risk of mistakes or poor business assumptions.
   
5. Reward performance instead of penalising good behaviour. Reward business units or departments who spent within their budget during the previous cycle instead of penalising them by cutting their budgets to unrealistically low levels. Unfortunately there is a unhealthy tendency in many businesses to squeeze those units that achieve regular savings even harder, while those units that overspent most of the time, are rewarded for their poor behaviour with increased budgets.
   
6. You are not an island. Budgets should not be done in isolation by management. Involve your team, as they know their areas of responsibility and could therefore provide valuable inputs on assumptions. Apart from spreading the workload, you also need to gain the buy-in of your staff to achieve or outperform the budget, so be sure to make them part of the process.
   

Whether you have completed your budget cycle or whether you are still busy crunching numbers, take note of these steps to guide you toward a solid foundation and reap the rewards of a more efficient budgeting process. A good budgeting process can become a powerful vehicle to engage your staff and improve your business results.