The funny things is I hate when companies budget! Budgeting is a math exercise that puts the cart in front of the horse. If done alone, all it does is calculate how much a company can spend at an assumed level of revenue to provide an acceptable profit level. Interesting, but not very helpful when running a company.
On the other hand I love when companies put together a great Plan! A good plan has a few parts that answer key questions.
• A SWOT analysis is very helpful. It forces a critical look at the companies Strengths, Weaknesses, Opportunities and Threats. This perspective will be a guide on establishing the companies goals in the both the short and long term.
• What is the competition expected to do and how will we either capitalize or defend against it? This is another perspective that will provide guidance in setting the specific goals to be achieved.
• What are the specific goals for the next year, three years or longer? Answering this question gives direction and focus to the entire organization and let's each employee know how they fit contribute to the organization’s success.
• What are the specific actions to be performed to achieve the goals and when will they performed? These are operational actions that can be measured. These actions include key hires, capital investments, other material expenditures, raising capital and last, but not least, when key orders will be booked.
• A budget!! Yes, a complete plan must have a budget as part of it. The budget is a financial expression of the planned actions. It is needed to tell management if the plans will achieve the expected financial goals.
The budget provides a very key role in the planning process. It forces management to make resource allocation decisions. These are often extremely difficult because it requires choosing not do a good thing in order to afford something else. To make the decision more difficult, the allocation decision most likely requires one manager or department to make a sacrifice so investment can be made in another department. Maybe the company chooses to hire a new sales person at the expense of investing in new capital. Does the company need to close an underperforming division instead if investing more in it so the company can grow a different part of the business? Buy more machines or outsource the work? These are all difficult planning decisions that the budget highlights.
Including the budget as part of the total operating plan of action allows variances in the financial performance to be tied back to the specific planned actions. As an example, revenue coming in lower than budget should not be a surprise if key orders were not booked on time or at all. The planned action of obtaining a sales order did not occur is the cause for the budgeted revenue to be missed. The same analysis is true for spending. A wonderful new hire for a senior position joins the company in April but was planned (budgeted) to occur in September. Nobody should be surprised when salaries are higher than planned and actions are required to curtail other spending to keep total expenses in line with the budget.
As you can see, budgets are a crucial component of the planning process. In conjunction with the operational action plans, the budget allows for optimal resource planning decisions to be made. In addition, during the year, variances to budget will highlight changes in actions or timing from the original operating plan and allow management to adjust accordingly.
On the other hand I love when companies put together a great Plan! A good plan has a few parts that answer key questions.
• A SWOT analysis is very helpful. It forces a critical look at the companies Strengths, Weaknesses, Opportunities and Threats. This perspective will be a guide on establishing the companies goals in the both the short and long term.
• What is the competition expected to do and how will we either capitalize or defend against it? This is another perspective that will provide guidance in setting the specific goals to be achieved.
• What are the specific goals for the next year, three years or longer? Answering this question gives direction and focus to the entire organization and let's each employee know how they fit contribute to the organization’s success.
• What are the specific actions to be performed to achieve the goals and when will they performed? These are operational actions that can be measured. These actions include key hires, capital investments, other material expenditures, raising capital and last, but not least, when key orders will be booked.
• A budget!! Yes, a complete plan must have a budget as part of it. The budget is a financial expression of the planned actions. It is needed to tell management if the plans will achieve the expected financial goals.
The budget provides a very key role in the planning process. It forces management to make resource allocation decisions. These are often extremely difficult because it requires choosing not do a good thing in order to afford something else. To make the decision more difficult, the allocation decision most likely requires one manager or department to make a sacrifice so investment can be made in another department. Maybe the company chooses to hire a new sales person at the expense of investing in new capital. Does the company need to close an underperforming division instead if investing more in it so the company can grow a different part of the business? Buy more machines or outsource the work? These are all difficult planning decisions that the budget highlights.
Including the budget as part of the total operating plan of action allows variances in the financial performance to be tied back to the specific planned actions. As an example, revenue coming in lower than budget should not be a surprise if key orders were not booked on time or at all. The planned action of obtaining a sales order did not occur is the cause for the budgeted revenue to be missed. The same analysis is true for spending. A wonderful new hire for a senior position joins the company in April but was planned (budgeted) to occur in September. Nobody should be surprised when salaries are higher than planned and actions are required to curtail other spending to keep total expenses in line with the budget.
As you can see, budgets are a crucial component of the planning process. In conjunction with the operational action plans, the budget allows for optimal resource planning decisions to be made. In addition, during the year, variances to budget will highlight changes in actions or timing from the original operating plan and allow management to adjust accordingly.
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