How to… plan a budget

Modern businesses cannot afford to leave their performance to fate. A key
management tool in determining and evaluating business goals is effective
budgeting; permitting the planning, control and monitoring of financial assets.

Flatter and more devolved organisational structures also mean that
responsibility for fiscal matters extend beyond the control of the finance
director and finance department. Organisations can no longer afford to carry
managers who are financially green. Having a thorough awareness of the
processes involved in budgeting will help you present a convincing case for
that vital conference trip or specific project and, more importantly,
contribute to the effective running of your department.

As Jean Pousson, consultant tutor to the Institute of Directors, who has
lectured and consulted for 13 years on finance, strategy and banking issues,
points out: "Budget-setting is essential as financial stewardship needs to
be maintained at all levels within an organisation. Every decision in business
has a financial impact and managers ignore this at their peril. The failure of
boo.com highlighted this two years ago. The founders admitted, had they had
proper financial discipline, the business might not have failed."

It may also be that you are considering setting up an HR consultancy or a
move into interim management, where budget setting will prove a necessary part
of running your business effectively.

Where do I start?

A budget translates the organisation’s mission and strategic course into an
economic blueprint for action. So the first step is to identify these aims and targets,
as they will shape preparation of your budget. An increase in manufacturing
output, outsourcing of the function or consolidation will all have an impact on
expenditure on key HR activities such as recruitment, training and development,
or redundancy provision and should influence your calculations.

Detail your anticipated costs under any relevant headings or in a matrix
along with summary explanations of how they were reached. This may help recall
at a later date and if a report has to be presented for approval. Use the
language of finance and recognised budgeting procedures (see below). It is
essential to relate expenditure on a specific project, function or service with
the benefits it will deliver to the organisation. Prioritise the most important
of them to ensure they, at least, receive sufficient funding. Make sure your
forecast is realistic: it is pointless to say you can recruit each management
trainee at a cost of £800 per head to earn a few short-lived plaudits when it
is clearly going to cost twice that amount.

Remember, even the most carefully constructed budget is based on assumptions
which can change, so expect to have to modify it.

Budget approaches

There is an assortment of budgeting techniques to consider with associated
pros and cons, but these are the principle methods:

Zero-based budgeting: as its name suggests, this method starts the budget
from scratch, or zero, rather than take the more traditional route of using
last year’s figure as a base on which to build. Any service or activity is
graded by cost and usefulness to the organisation’s goals. Outdated functions
are rendered obsolete.

Incremental budgeting: figures from the previous year, or years, form the
starting point and are then adjusted to account for growth, inflation and so
on. The downside of this method is that if an error was made previously, the
mistake is compounded each year. It presupposes that most enterprises will
remain unaltered and requires approval for new ones.

Smart planning

Give yourself plenty of time to think the numbers through. It may take
several attempts to get them right, but the more informed you are, the greater
the chances of your budget being well conceived. So follow this checklist:

– Gather all relevant data such as previous year’s budget sheets and records
for analysis

– If you didn’t do the budget last year, speak to who did. They may provide
valuable insight into how that crucial extra funding was secured

– Canvas the views of all your colleagues who have a vested interest in the
process

– Use your network – contacts in similar organisations can also provide
useful input

– Track monthly financial statements to assess deviation from annual
predictions and allow sufficient time to take remedial action.

Where can I get more info?

Books

– Essential Managers 19: Managing Budgets by Steve Sleight, Dorling
Kindersley, £4.99, ISBN 0751307718

– Budgets for Non-Financial Managers: Turn your budgets strategy into a
valuable management tool by Ian Maitland, FT Prentice Hall, £17.99, ISBN 0273644947

– The Easy Step by Step Guide to Better Budgeting for Your Business by Brian
B Brown, Rowmark, £9.99, ISBN 0953298787

If you only do five things…

1 Remember every decision has a
financial impact

2 Collect all relevant data

3 Use financial language and appropriate budgeting procedures

4 Relate the expenditure to business benefits

5 Be prepared for adjustments

Expert’s view: Jean Pousson on budgets

Jean Pousson is a consultant tutor at the Institute of Directors where he
runs courses including finance for non-financial directors and strategic
business direction. He also runs a specialised consultancy practice, which
provides banking, finance and strategy training.

What is the latest thinking in budgeting?

The budget is a management tool that can be tracked back to the 1920s and in
many organisations, the budgetary process has little changed. Financially
accurate budgets are now becoming more aligned to critical success factors and
strategic imperatives. We are also seeing 12-month rolling budgets as opposed
to the inflexible and terminal 12-month budget. The key is to have a process
which helps you run your organisation rather than just a financial collation
exercise.

What is a common oversight when drawing up a budget?

Far too often, lessons of the immediate past are not learned. Budget-holders
often just increase last year’s figures by a set percentage without realising
the changes in the industry or the company. Assumptions are not questioned,
trends not detected and budgets are often rushed to meet unrealistic deadlines.

In your experience, do HR professionals and their interpersonal and
people skills, such as negotiating, make for good budgeters?

HR professionals don’t necessarily make good budgeters. Good negotiating
skills if complemented with good political lobbying can often result in bigger
budgets. The bigger influence tends to be the company’s culture and the
strength of the finance department.

Are there other benefits of preparing a budget, such as managing risk,
for example?

A budget, besides giving the obvious benefit of financial discipline, can
assist in risk management, strategic implementation and value chain management.
It can be a very useful tool in the early detection of changing customer trends
and behaviour.

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