Budgeting is an essential aspect of good business management. Formulating and continuously monitoring a realistic and adequate plan for all expenditures and revenue is a critical business success factor.
However, budgeting can be become complex as most businesses operate with more than one budget at a time and this presents potential pitfalls. Subsidiary budgets that seem independent of each other are still incorporated in the overall annual budget where they are all fundamentally inter-related. A slight overspend on the marketing budget may not look like a serious threat; but a slight overspend on many of the subsidiary budgets in the same time-frame could mean disaster.
This gives rise to the imperative that those who plan and monitor budgets have to keep the many facets of the bigger picture top of mind.
Target budgets to meet objectives – Budgets must allocate funds towards achieving identified objectives that are aligned to overall business goals. For instance, you don’t budget for entertainment expenses because it’s nice to have. The entertainment budget must reflect the sales objective to build relationships with X prospects during the time-frame.
Capital expenditures also need to be related to the overall corporate objectives. However much you might want to invest in having increased production capacity, this must weighed against the likelihood of having the increased orders to justify this. It can be more cost-effective to subcontract in order to deliver unexpected orders than for an expensive piece of equipment to stand idle. The budget could rather be allocated to securing the increased orders.
Seek out the hidden and unexpected costs – You need to identify all costs associated with a particular expenditure. The budget for a new piece of equipment is not just the cost of the item. You have to also think about and factor in the costs of delivery, installation, maintenance, insurance, powering the machine and operator training. These can be a substantial amount and if you haven’t anticipated them all that can turn out to be a big problem.
This doesn’t just relate to a physical purchase. The spin-off of an increase in a marketing and sales activity may be having to invest unexpectedly in handling enquiries or providing information.
Rise with the real costs – We all know that year-on-year costs will increase, but your answer to the question: ‘by how much?’ will determine whether your forecast is adequate. Some rely on Treasury forecasts, but this is no way to ensure that price rises are accurately predicted.
Different categories of expenses rise at different levels, for example, at this time wage increases are slower than the costs of power. It helps to get in touch with your major suppliers and have the discussions about the prices increases up ahead before setting your budget.
Anticipate all impacts – Your budget needs to accommodate consequences across departments. If you are launching a marketing drive to boost sales make sure you’re making allowances for the impact across other departments too. Increased sales means increased costs in other areas such as delivery, shipping and the handling of complaints.
The transference of expenses also needs to be well-considered. For example, it may not be necessary to make an inflationary increase in your maintenance budget if you’ve just invested in new machinery. But if you’ve just grown your team, then it’s not wages that go up as this also impacts on training, office facility and staff benefit costs.
Factor in negative effects – If your business is in a growth phase, you may run the risk of putting more focus on increased revenues than costs. But there’s a negative aspect to growth – it simply costs more. A boom in sales may seem great until you find yourself short of budget to handle the increase in returns and the means to manage more bad debt
Costs may also arise unexpectedly if they come about because of taking advantage of opportunities or dealing with disasters you didn’t anticipate. There are often negative effects to upgrading hardware and software. It is common not to provide for failure or downtime during implementation.
Keep it flexible – It’s impossible to effectively set a budget in stone, and the measure of a successful budget is not that you get it right at the start and make no changes. By nature, budgets need to be flexible so that you can handle change, resolve challenges, take advantage of boom times and cut back during down turns.
Your budget is a living document that needs to be tended to dynamically. Building a co-operative team in charge of the budget helps. Real-time monitoring of actual revenue and expenditure against the projections enables you to re-allocate funds when necessary to stay in line with your business goals.