There is no need to quote business failure rates among companies in the past year, nor mention the steady stream of survey findings that say lack of good management practices is usually to blame when a company falls short of its potential. Instead, it would be more productive to follow some tips to make budgeting easier. These tips can help you even if you’ve never built a budget before, or at least never done it successfully.
Your goal, and how to get there: Profit planning, or budgeting, is far and away the most effective way to consistently meet profit targets and avoid costly surprises. It helps you invest your resources to the best advantage, based on careful consideration rather than the urgency to make a move today. Here are eight tips to get you there:
1. Take the time to include the team. A budget is not the forecast you put together on the weekend to impress your banker. It must be the result of coordinated input and effort by you and your top management team. That makes it a project that requires some time and thought, just like any other important project your company takes on.
2. It takes a little practice, like any new tool. Regardless of how tough it may be to estimate the future, your forecasting accuracy will improve, and you’ll be better able to control the results, if you actively use a budget. Practice does make (almost) perfect.
3. Any business can be budgeted. The only question is how much practice it takes to strike a balance between time invested and forecasting accuracy. If you doubt this, remember that virtually every startup business had to be forecasted to get financial backing, including those trying to do something that had never been done before (making budgeting even more challenging).
4. Use a Gantt chart—an expanded timeline—to track deliverable dates for budget completion. As with any project management tool, it will tell you if you’ve scheduled too much to be completed in too short a time, given other business activities that also require your team’s participation.
5. Don’t try to budget to the last penny. Accurately predicting actual results is not the objective, nor is the creation of an immovable objective. It’s all about giving your company a guide to use for course corrections, and at the level of detail where it matters. If you try to forecast every little expense, the details will drive you crazy.
6. Make tradeoffs when necessary. You have a finite amount of resources available to you. If you must spend money for something you didn’t budget, then decide what budgeted expense can be removed to "finance" the new item. Without that discipline, you will almost always overspend, because there are always good reasons to spend money. They don’t always produce more profit, however.
7. You need profit and cash-flow targets. Every budget should have both of these two bottom-line measures because they are very different and they require different kinds of attention to control them. If you doubt this, know that every year businesses with smashing profit pictures go out of business for lack of cash.
8. Use three questions to gain powerful results analysis. At the end of each month, with budget comparisons in hand, ask your team these key questions:
- How are we doing compared to budget? Why did actual results differ from the plan?
- What must we do NOW to have a better result next month? How can we keep the positive differences and avoid more of the negative ones?
- What are we learning that will make next year’s budget better?
If you follow these eight tips in your financial forecasting and reporting, you will find your income statement more informative, your bottom line more appealing, and your peace of mind more comforting than ever before.
Gene Siciliano, CMC, CPA, is an author, speaker and financial consultant who works with CEOs and managers to achieve greater financial success in a dramatically changing economy. As “Your CFO for Rent” and president of Western Management Associates, Siciliano has spent more than 20 years helping his clients build financial strength and shareholder value through applied knowledge and process improvement. His book, “Finance for Non-Financial Managers,” is available in bookstores and online. More information and free articles are available at www.genesiciliano.com.
