Do You Know Where Your Budget Is?

Think | Act

One in a series of Leadership Articles to cause you to think and perhaps to act. Read other articles.

It’s annual budget time again for those of you who budget on the calendar. A typically painful effort for many people, though usually self inflicted. There are ways to make this difficult but necessary effort at least a bit more palatable. We’ve commented before about budget preparation and this contribution is going to focus on some ways to assist you in structuring your budget preparation.

Five pitfalls to effective budgeting

  1. Attempting to budget at a detailed level without detail support data—In most cases budgeting at a higher level that your accounting systems record at is OK. IN many cases attempting to get a forecast of minuscule or detailed line items is complete waste of time. Set a threshold or exclude specific line item detail to assist in getting your budget done efficiently.
  2. Becoming too formulaic—in a number of engagements we have worked with companies to assist them in getting financial plans and budgets prepared. In many instance there is a feeling that a budget can be driven entirely by formulas. This ’spreadsheet’ mentality causes many companies to eliminate the sober second look at the numbers and their relationship to reality.
  3. Allowing for a ‘free fall’ budget—all too often we see that, in creating budgets, companies do not define the backdrop to the preparation. The strategy and it’s ultimate implications are often discussed at a high level but never effectively communicated at the working level of budget creation. All strategy implicitly defines certain expectations, constraints and objectives these must be visited in the creation of the budget.
  4. Boiling the ocean—too frequently we see that well intentioned budgets are attempting to be all inclusive of everything that might possibly affect the company. While a noble effort it generally is a misguided strategy better that you develop an encompassing contingency than to try to detail all of the stuff you might run into.
  5. Placing budget control in the hands of those who make decisions—all too often we see that folks who have developed budgets just don’t put the control of those budgets in the hands of the people whose decisions directly effect the results. The rule here is to budget at the level where at least 50% of the included costs or revenues are decided upon. Make decision makers accountable for the financial results if they significantly contribute to them.

Typical Types

Budgets come in many types but the two that mostly are relied upon in the corporate world are;

  • year-over-year (incremental) where prior years results are modified by some expectation of a combination of price (inflation), growth and productivity, and
  • zero based budgeting (ZBB) where each budgeted line item is assumed to be based upon a zero start level and each revenue and expenditure has to be justified upon it’s own merit.

There is no one correct way but in many cases a combination of both is effective. Existing business may use incremental and new business uses ZBB. In any case if your busget is due soon you best use of effort is to get it done soon and manage it effectively.

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  1. The types of business plans for small business | Shulist Group Inc.:

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