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Do You Budget

Jan 18, 2010

Why should you budget?  Because “it’s something we do every year,”or is it a “big stick we use to cane those who don’t perform.”  Is this really the intended purpose of budgeting? How about “we budget in order to achieve our strategic goals”?

Budgeting is part of a larger process called “performance management.”  Performance management is a logical approach to the way organizations direct and manage resources to achieve objectives. Thus, budgeting’s central role is to allocate resources to the activities that drive value.  Organizations must therefore concentrate on two questions: 

  • How can we beat last year’s performance?
  • What is our competition doing, and how can we beat them?

The answers to these key questions typically appear in a strategic or operational plan, against which budgets can be set and monitored for effectiveness. But if that plan is vague or incomplete, the resulting budget will not help the organization implement its strategy.

Most organizations have plans. There is, however, a huge difference between a good plan and a bad plan. A bad plan, for example, is one that focuses only on costs and revenues. This plan provides no guidance for the organization regarding how it is to achieve the revenue targets. There is no linkage between the high level goals and the day-to-day activities necessary to achieve them.

Performance management is all about managing the activities that generate results. Those activities should directly support the organization’s strategic objectives. Therefore, a good plan acts as a road map, showing the organization how it should move from its current level of performance to the desired level of performance, based on the perceived economic environment.

According to Answerthink, a management consultant firm there are eight planning best practices of high-performance organizations:

  1. Good plans answer directional questions. Some are, “Where are we going?,” “How are we going to get there?,” and “What happens if things do not turn out as planned?” High-performing organizations do not assume that Plan A will always work. Instead, they prepare alternatives in case they are needed.
  2. Good plans typically address three activities. They are (1) how will we maintain current operations, (2) how will we improve the efficiency of current operations, and (3) which new ventures or initiatives the organization will we implement. In this way, any change in performance can be assessed in terms of the type of activity.
  3. Good plans— and organizations—are focused. High-performing organizations do not plan in detail. More detail does not equal more accuracy. More detail does, however, negatively affect the time available for good analysis.
  4. Good plans include all aspects of the business. In addition to detailing how goals will be achieved, good plans also describe how the organization can continue to be effective for the future.  Thus many of the measures within a plan will not be financial. Employee knowledge, customer relationships, and the culture of innovation may create the bulk of value for any organization.
  5. Good plans link strategies to activities. Activities are linked because the achievement of an objective is the result of doing the right things well. Activities as well as their impact on achieving strategic goals are monitored. By understanding these relationships, organizations begin to understand—and can build on—the true drivers of success.
  6. Good plans are measurable. Objectives and strategies have measures of success, while activities have measures of implementation. In this way, the completeness of an activity can be correlated with the success of an objective.
  7. Good plans include assignments for accountability. In high-performing organizations, specific people are made responsible for individual activities. They are empowered, rewarded, and have control of the resources to ensure the delivery of the activity.
  8. Good plans include the recording and monitoring of assumptions. High-performing organizations monitor a range of business assumptions that are tied to the targets set for corporate objectives. If the organization discovers that their business assumptions are incorrect, they reconsider the associated plan targets and adapt accordingly.

Doing budgets well is not for the faint of heart, but failing to budget is almost a guarantee of business failure.

David Kirkup, Partner, B2B CFO - 404 348 0326 - dkirkup@b2bcfo.com

 

More from David Kirkup…

About the Author

David has over two and a half decades of business experience and is a proven financial management expert. Working in Europe and the USA, David has served as Divisional CFO at a number of Fortune 500 corporations: including Reuters, Marsh & McClennan, Zurich Insurance and ADP as well as numerous small and mid size companies. As part owner of a small software company, he was heavily involved in the marketing efforts and ultimate sale of the company. As CFO with a national PEO firm he dealt with the credit and financial issues facing hundreds of small business clients. David also spent 5 years in Bermuda managing captive insurance companies.

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