Creating a business budget is every bit as challenging as the work that has gone into the federal budget.
Look over the last few federal budgets; some have been massively inaccurate with forecasts. This year’s federal budget surplus depends on GDP growth of 3.25% for 2012-13. That’s almost one percentage point higher than the growth rate last calendar year.
It also hinges on only a slight rise in the unemployment rate at a time of daily reports about companies closing down and job losses. It has also forecast a modest fall in the terms of trade, which in recent years have been near record highs. There are no guarantees.
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The same uncertainty goes for business budgets and for good reason too. With the Australian dollar, the impact of global markets, business uncertainty and rising insolvencies in the non-resources sector of the economy, a business budget like the federal budget can be a bit of a crap shoot.
No budget can ever deliver to the cent, it’s a forecast. The actuals are different and there might be times when budget figures are way off target. The mark of a good budget is how close it gets to the actuals.
That said; every business needs a budget. John Downes, who runs the consultancy firm Acorro, puts it bluntly. “You would be delinquent as a CEO or business owner starting the year without a budget,’’ Downes says.
“It’s not negotiable. It’s not a question of whether you should or not.’’
So, in the face of all this volatility, how do you prepare a budget that matters for your business? Here are 10 tips.
1. Have a business plan first: the budget is part of that plan
No small business owner can afford not to have a plan in these credit-constrained times.
The plan helps clarify whether the business is headed in the right direction; whether the market is growing as fast as the business owner thought; whether the entrepreneur has the right products and the right staff; and whether the margins are correct and what the competition is doing.
Mark Allsop, a partner at Deloitte Private, says the budget needs to be part of that process. “Budgeting should be part of an annual business planning cycle,’’ Allsop says.
“Business planning considers more than just financials. Financials are an outcome.
“If you do a robust business plan, you are looking at your market place and how that might change and that will have some financial impact that will be reflected in the budget.
“You are looking at your staffing and skills profile and how that may change and that will have an outcome that is also represented financially in the budget.
“And you will look at all of your capital requirements, your trucks, your cars, your printers, your computers and the outcomes of that investigation will have a financial outcome that gets impacted in your budget.
“The financial things to my mind are just outcomes of other considerations.”
2. Have the right people
The chief executive officer or managing director – along with the chief financial officer, financial controller, head accountant or other chief number cruncher – are the ones in charge. The buck stops with them.
But that’s a minimum. Consultant Joel Barolsky says a budget needs to be a team effort. If, for example, the company is looking to invest in a particular piece of equipment, it would have to call in the plant manager. And so it goes.
“With a variety of inputs on the revenue side, you would need to get the marketing and sales people involved to challenge the assumptions around revenue and sales,’’ Barolsky says.
“You would be getting your HR people involved around resource planning. Operational people might have key capital requirements or key strategy initiatives.
“It is very much a team approach and should be run that way. Finance people can’t do it in isolation. It really needs to be a collaborative process.”
Consultant Kevin Dwyer, who runs The Change Factory, says things become dysfunctional when they are not done by the team.
“You don’t want all the department heads saying, ‘What does that mean for us?’ when you give the budget at the end of the budget session.
“You are starting well behind the eight ball when people are trying to work out what the budget means to them. They have to know at the end of the budget session what it means for them because they helped build it.”
Downes says the team needs to express their concerns freely.
“Sometimes you will see management without challenge try to deliver a magic number without anyone actually challenging as to whether it’s steep enough or whether it’s achievable,” he says.
“Being realistic and achievable is the most critical part of the budgeting process.”
3. Time frame
Preparing a budget takes time. Most experts, however, warn you shouldn’t overdo it. Downes says spending too long on it results in a law of diminishing returns.
“For a small to medium enterprise, if you are spending eight weeks on it, there’s an awful lot of navel gazing going on and not a lot of delivering the business,” he says.
“If you are spending more than four to five weeks on the process then – unless you are doing some new-fangled data analysis of every customer known to man – I think four or so weeks is more than enough to do it. It’s not rocket science.”
Allsop says two weeks is sufficient for SMEs: “A couple of weeks would be enough and that’s not a full-time process.”
4. Go on a retreat as part of the preparation
Dwyer recommends heading off for a few days with key people to talk about what needs to go in the budget. Taking it outside of work creates a space for fuller discussion.
“You go away for two or three days with someone who has done all the analysis on what you spent last year, what’s recurring and what’s projected in the spread sheet,’’ Dwyer says.
“So you spend the first day talking about blue sky. What can we do with our business strategy to improve our bottom line? You allow people to have full rein. And you have someone there who can do all the number crunching and get an idea of the impact.
“One the second day, that’s when reality bites. That’s when you say here are all the good things we can do but here are our limitations.
“We can increase our staff numbers by more than this, we can’t increase our costs by more than that, the federal budget might decrease our revenue by such an amount and so on.
“The idea of doing this is it gets people thinking about what’s possible and what can be achieved.”