Effective Budget – the right path that leads to ultimate success
20 Jul 2015 - {{hitsCtrl.values.hits}}
On 20th April, we started reviewing the contents of a good Business Plan. Having completed the strategy phase of your strategic Business Plan, you must decide how you will monitor its execution. Therefore, before implementing it, develop procedures for both control (comparing actual and planned figures) and review (deciding whether planned figures should be adjusted or other corrective measures taken).
This final section incorporates your operating budget.
Business budgets allow you to control the financial flows, or cash flows, in your business instead of allowing your business to control you. If you are going to make a profit, you have to design a system to allow that to happen. That system must operate within a system of financial controls so that your goals are reached. You set up performance standards in order to communicate to yourself and employees what is expected in order to meet your profit goals. The performance standards are the building blocks of your business budget. The budget is a detailed statement of financial results expected for a future time period.
Included below are examples of additional reports or data sheets for you to consider. They are designed to monitor progress at key checkpoints of the plan and to permit
either major shifts in strategies or simple mid-course corrections.
1. Forecast models related to the industry, environment, competition and any other areas applicable to your company and
your plan
2. Sales by channels of distribution, including Inventory or out-of-stock reports and Average selling price (including discounts, rebates or allowances) along the supply chain and by customer outlet.
3. Profit and loss statements by products, by divisionz.
4. Direct product budgets
5. Administrative budget
6. Expenses by quarter
As an overall guideline – regardless of the forms you use, make certain that the system serves as a reliable feedback mechanism. Your interest is in maintaining explicit and timely control so you can act swiftly to impending problems. Further, it should serve as a procedure for reviewing schedules and strategies.
The central challenge that you will face is mapping out the future, something that can never be done with perfect precision. The fast pace of technological change and the complexities of global competition make developing effective budgets both more difficult and more important. Important benefits of improving the budgeting process include better companywide understanding of strategic goals, more coordinated support for those
goals, and an improved ability to respond quickly to competition.
Link budget development to corporate strategy
Because the budget expresses how resources will be allocated and what measures will be used to evaluate progress, budget development is more effective when linked to overall corporate strategy. Linking the two gives all managers and employees a clearer understanding of strategic goals. This understanding, in turn, leads to greater support for goals, better coordination of
tactics, and, ultimately, to stronger companywide performance.
But how is such a link created? Top management must take the lead in developing and communicating strategic goals. But to develop those goals, top management needs information about customers, competitors, economic and technological change - information that must come from customer-contact and support units. Companies that establish effective channels for communication find it easier to set challenging yet achievable strategic goals.
Design procedures that allocate resources strategically
Within any company, competition for resources is inevitable. Every function and business unit needs funding for both capital and operating expenses - usually in excess of the actual resources available. This makes it critically important for companies to design procedures so that resources are allocated to support key strategies.
Good companies find that resource allocation is part science, part art. Fortunately, following certain best practices leads to better results. One such practice is coordinating the review of operating and capital budgets. Doing this gives managers insight into the ways in which changes in one budget affect the other. There are other methods of evaluating proposed budgets. But those are sophisticated and do not justify for small and medium companies.
Tie incentives to performance measures other than meeting budget targets
Many companies still evaluate managers primarily on how closely they hit budget targets. While this may seem logical, in reality this type of one-dimensional evaluation tempts managers to “win” by playing games with budget targets. Such game playing isn’t always in the
company’s best interest.
At good companies, meeting budget targets is secondary to other performance measures. Such companies use a balanced set of performance measures to chart progress toward strategic goals, and use the same measures in their incentive programs. This reinforces the importance of key strategies and communicates what results will be rewarded.
Reduce budget complexity and cycle time
Good companies strive to reduce budget complexity and streamline budgeting procedures. Such streamlining allows management to collect budget information, make allocation decisions, and communicate final targets in less time, at lower cost,
and with less disruption to the company’s core activities.
By controlling the number of budgets that are needed and by standardizing budgeting methods, companies take important steps toward streamlining budgeting. Another key step is to minimize the amount of detail included in the reports used to develop budgets.
Develop budgets that accommodate change
By developing budgets that accommodate change, companies can respond to competitive threats or opportunities more quickly and with greater precision. They can use resources efficiently to take advantage of the most promising opportunities.
Companies typically review budgets quarterly, monthly, or even weekly. By including in these reviews reports on changes in business conditions, companies alert managers that new tactics may be called for, if they are to meet their targets for the year. While it is important that budgets not be revised to cover up for poor performance or poor planning, good companies choose to revise budgets rather than adhere to budgets that do not reflect current conditions.
The only other section in your strategic plan is an appendix. It should include
the following:
Relevant industry data and some research that provides information on trends, product usage, market share, and the like.
Data on competitors’ strategies, including information on their products, pricing, promotion, distribution, market position, as well as profiles of management leadership
Details of your new product features and benefits.
After completing your Business plan, take a thoughtful look at its key parts. They may contain far-reaching and unique features to propel your company forward. Yet, be absolutely certain that in addition to the physical and financial resources to implement the strategic plan, it is also aligned with the culture of your company. That is, can your company’s history, its behavioural patterns and leadership, the attitudes, temperaments, and skills of employees, their capacity to confront aggressive competitors, and their ability to live with risk, support the plan. Also determine if you have sufficient resources, including financial, and physical, to implement the plan.
(Lionel Wijesiri, a corporate director with over 25 years’ senior managerial experience, can be contacted at [email protected])
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