Budgeting is probably the least-loved business management tool. Even the word "budget" brings to mind disapproving accountants and denied requests. And how often have we heard the phrase, "it's not in the budget"? Nevertheless, budgeting is one of the most valuable tools in your management arsenal.
What Do I Get Out of Budgeting?
Let's look at what budgeting can do for your business: Budgeting puts the money where strategy's mouth is. I call it strategic alignment. Spend money on strategic priorities.
It sounds obvious, but during more than 30 years' working with businesses of all sizes that are trying to grow, I've seen them do just the opposite: They talk about priorities when they get together, but spend on other things entirely. For example, I worked with a company that intended to emphasize customer service but spent nothing on employee training, more employees or better-quality items to sell.
Budgeting Means Taking the Wheel
The next question is: How will I know whether I'm actually addressing priorities in my day-to-day operations? You think it's obvious, but I've been there: The phone starts ringing, fires need to be put out, days and weeks and months go by.
With the budgeting process, however, you can turn to the numbers and see how your spending breaks down into categories. Compare that to your original budget. Now you have a tool to track your progress and, of course (here's where the management comes in), make corrections.
Budgeting is Precaution, Safety and Risk-Proofing During a Storm
If the economic news spells a recession, we all run to our budgets to prepare for the storm. If sales go down, we need to recognize it quickly and identify possible course corrections. Usually that means watching expenses. That's all budgeting. Budgeting is about process, not just numbers.
So that's how I look at budgeting: It's a process, not just a budget. What's really important about budgeting--and where you get the real benefit for your business--is in completing the full process. That means you develop a good budget for the beginning of the year and then carefully manage changes--budget plan vs. actual budget--throughout the year. Here are nine tips to help you develop a good budget:
- Your budget will be wrong; all budgets are: Budgeting means guessing the future--and it doesn't have to be an accurate guess to be vital to management. If you don't have a budget--even if it's off--you can't work with it to correct your course.
- The review process is absolutely critical: It isn't the budget itself that makes the budgeting worthwhile. It's the review that comes regularly, focusing on what's different from the budget. That means comparing budgeted expenses to actual expenses.
- The most important single point is the review schedule: Never finish a budget without setting a schedule for budget review. That means when, where and who will attend the meeting. As my company grew from just me to 40 employees, we set up a regular budget review the third Thursday of every month, giving us enough time to close the month. It doesn't take long. We bring in lunch and we're done by 2:30 p.m. Budget review is a powerful management tool. Bringing your people together to work on the budget builds an automatic peer process, pride in the performers and incentive for those who can do better.
- Keep the assumptions visible: The first agenda item in the review meeting is to look at the assumptions. What's changed? How does that affect our budget? We live in constant change, so good budgeting keeps the change where we can see it and manage it. Sticking to a budget isn't necessarily the best course. Managing a budget, by seeing how assumptions have changed and correcting the course, is better.
- Keep it simple: Try to build the budget so the information that comes out matches the people responsible as much as possible. Keep it summarized so you can see it well. If you divide the information into lots of detail categories, all you see is the trees, and management requires seeing the forest. Build it so you can summarize and aggregate.
- Tools, tools, tools: You may be like me, in that one of my weaknesses is that I get lost in the tools--the accounting software, for example, or the management database--when what really matters is the human process, the discipline to do things right. Just in case that's true, let me offer some battle-scarred tips about the tools:
. Your bookkeeping software isn't the problem. There are lots of competent software tools that help you keep track of the money and manage the budget. Some are better than others, but the best one for you is whichever one works with easy data export from your bank.
. Usually banks offer two or three options for data links. Let your bank do the heavy lifting of data entry. I've worked with Quicken, QuickBooks, Microsoft Money, Accpac and several versions of Sage and Peachtree. Right now my favorite is Netbooks. But the software isn't the problem. If your software doesn't talk to your bank, look into that and consider switching. If it does, then software isn't your problem.
- Match your accounting reports to key management items: It's called chart of accounts, and what it means is setting up categories that match control and responsibility, and the information you can manage later on. Accounting is going to be very detailed, but budgeting and budget management need summaries of categories and more aggregation.
. Set up your budget so you can see strategic priorities. For example, in my company we needed to view sales by product and by channel, so we built the chart of accounts to categorize sales by product and channel. I worked with a coffee shop that needed to see sales broken into general categories such as drinks, food items and accessories. If that's what you need to manage, then set up your bookkeeping to show it.
. As another example, break expenses into areas of control, like who's responsible, rather than type of expense. We have travel broken into upper management travel, sales travel, marketing travel and product development travel, because we want visibility for the specific people in charge of sales, marketing and product development. And that's a company with 40 people, not 4,000.
- Consistency matters, regardless of tools: Do as I say, not as I've done. Some years we keep switching categories in the budget, trying to get better visibility. Those years we typically have less information because we can't go back to the past. When we stick to our categories over time, it's easier to see trends.
- Do the above.You'll be glad you did: Good budgeting brings your words and your numbers together. This is what you need to control and steer your company toward the future you want. The alternative is haphazardly reacting to events--essentially drifting. Good budgeting lets you control your destiny. Make no mistake: Budgeting is one of the keys to management.