Friday 28th June, 2024
As we get closer to the end of another financial year, how did you perform against the company budget? Was the year a success? Did you achieve the growth that you predicted back in 2023? Need any Budgeting Top Tips to make this year even better?
Budgeting for future years is one of the most important tasks for company leadership teams. Putting aside enough time to produce a budget that is a balance of what is achievable and what maximises the potential is always a challenge. The frustrating thing is that it takes a year to know whether you were right!
BUDGETING TOP TIP 1 – WORK FROM THE RIGHT STARTING POINT
Budgets are normally set using historic information, and then adding a % increase,
i.e. –$4m last year / want 20% growth / new budget = $5m.
In the most part this is correct, but what if last year was exceptionally good or poor? This could influence the future budget. Either setting targets which are out of reach or targets that are too easy to hit.
The first step is to understand the previous year in more detail rather than just the headline figure.
For example –
I once secured £750,000 new business specifically for the London Olympics. This was not going to be repeated in the following year. If 20% growth was applied, then the budget may be unachievable.
Conversely, the Global Financial Crisis, for some companies led to a low level of sales. Adding 20% growth to this baseline might not provide enough of a challenge for the business.
For the reasons above, and others, it is never wise to simply look at a 1 year comparison. It is – far better would be to look at performance over 3-5 years. Once a baseline is set, management can then start the debate about how much growth is achievable.
BUDGETING TOP TIP 2 – A BUDGET IS NOT A WISH LIST
Employees take notice of the company budget. The figure set will often directly influence their level of activity, incentives and ultimately performance.
Budgeting must balance the need for company growth and be achievable. Get it right and it will set the example for the entire company. Get it wrong and it can demotivate your team and affect the performance throughout the year.
Like KPI’s, the budget should follow SMART principles – specific, measured, achievable, realistic and timely.
BUDGETING TOP TIP 3 – INVOLVE KEY STAKEHOLDERS
There are two main types of budgets – top-down and bottom-up.
A top-down budget is set by management and implemened to employees below. Conversely a bottom-up budget is where customer facing employees set expectations on a micro level. The combination of these then forms the budget.
Neither is perfect. A top down budget can be resented by staff who perceive that they are forced into unachievable targets. A bottom up budget may not push a company forward enough.
However, there are ways to use a combination of both methods. In my opinion a good starting point is to gather opinions from the customer-facing staff about what they think.
Information should include –
- general market conditions
- competition analysis
- non repeatable sales (see Tip 1)
- potential for appetite for price increases
- potential growth opportunities
This provides management with an outline of what those staff consulted believe is possible in which areas. If this is in line with company expectations, perfect. If not, then implement a top down budget by using the information to load certain areas.
BUDGETING TOP TIP 4 – NEW OPPORTUNITIES
Finding new opportities is the best way to budget for growth. One owner that I had the pleasure of working with would always ask, “What are we going to do differently?”. Don’t following the well-known adage defining insanity as doing the same thing over and over and expecting a different result.
In most business, there is the potential to generate more from avenues that already exist. Increasing market share, increasing prices or the replicating successes, and these will normally deliver low to medium percentage point rises. New opportunities provide 100% growth and will make the biggest difference in future company performance. In years to come they become additional revenue streams.
In a budget, these new opportunities are as important, and sometimes more important, than marginal gains from existing revenue streams.
BUDGETING TOP TIP 5 – COMMUNICATION IS KEY
Once set, the next most important task is to communicate the company expectations to all stakeholders.
Employees welcome the presentation of the steps taken to create the budget. Particularly if a bottom-up process (see Tip 3) has been followed. This should lessen any erosion of confidence in the bottom-up process.
Individual meetings should occur to ensure clarity on what their role is in the overall budget. And also their individual targets, address any concerns and set future dates for review.
Need any additional support in setting your business’s goals? Reach out for a no obligation chat at info@fbsconsulting.com.au or phone 0468 794 040. Also, if you enjoyed this blog there is more to be found at our Latest Blog Pages.
We are here to help your company grow.
Have a great weekend. Drew