Budgeting garners a variety of reactions. Some are annoyed that nobody ever wants to look at them or follow them. Others don’t know how to read them – so they just ignore them. Then there are some that just follow the mantra – everything is going to be alright. But we have seen some budgeting errors that resulted in over $1.5 Billion of deficit.
I recently had a conversation with a CEO that a budget was useless and he could manage his cash by using the bank. Needless to say, I was shocked. Over the course of my career, I’ve written hundreds – if not thousands of budgets, financial models, business plans. It’s been cumbersome, annoying, and I can’t tell you how many times someone has tried to ignore it. It’s a pain and I figured I could communicate it easier. Every company needs a budget, but it’s made to be so complicated AND no one follows it. So, I’ve created some good budgeting processes that you can apply immediately.
One of the budgets revolves around your cash flow. Remember, cash is king. If your cash is limited or you just want to improve it, then access our 25 Ways to Improve Cash Flow.
What is a Budgeting Process?
A budgeting process is a plan for the greater plan that helps you make strategic decisions and steer your company is the right direction. A budgeting process (or plan) enables you to keep your company alive.
“During every minute of the flight, I was confident I can solve the next problem. My first officer, Jeff Skiles, and I did what airline pilots do: we followed our training, and our philosophy of life. We never gave up. Having a plan enabled us to keep our hope alive. There’s always a way out of even the toughest spot. You can survive.”
Capt. Chesley B. Sullenberger III
What A Good Budget Looks Like
Often, I get asked what a good budget looks like. A good budget allows the manager or executive to have control over what is going on with the cash. It builds both accountability and ownership for the employee and the manager. A good budget also allows anyone to make quality decisions – rather than making decisions completely blind. In addition, a good budgeting process generates discipline – thus, creating empowerment and success.
“A well-constructed numerical estimate is worth a thousand words.”
Charles Schultze, former Director of the US Bureau of Budget
What A Good Budget Does Not Look Like
Just as important, we also need to look at what a good budget does not look like. In my career, I’ve seen numerous budgeting problems or pitfalls when working in my own companies or with clients. There was a lack of accountability. Employees ignored the budget, didn’t follow it, and found ways around it. Additionally, the budget could only be applied to specific groups/managers as it was not a universal budget. Their budgets resulted in power plays and managers played games, instead of leading their company forward.
Budgets also take time. I’ve spent months, working everyday on just one budget. The current process for preparing a budget takes too long. I’ve also seen clients with budgets that were wrong from the beginning. They built their budget on faulty or unrealistic assumptions. Or they ignored their team members’ concerns. The team was fractured.
And they established goals that were too easy to reach or simply unachievable! Other clients spend all this time creating a budget only for it to be filed away when completed. The common budget process calls for a lack of follow up. Feedback on budget performance is either slow or nonexistent. CFOs, controllers, and budget directors can’t do their jobs effectively without that feedback.
Finally, executives and top management have hidden agendas or aren’t committed to having a budget. They’ve gotten this far without using a budget, so why need one?
Good Budgeting Processes
There is also no right way to prepare a budget. Each organization must find its own process. But there is an easier way to prepare a budget with your own process. Everyone sees budgeting as the CFO’s or accounting department’s responsibility, but a good budgeting process involves the entire company. There are a couple key things that you need to look at as you evaluate good budgeting processes.
Have These Four Budgets
In fact, there are really four budgets you need to account for. These include the
You cannot get to the capital budget and balance sheet budget until the operating budget is complete. So that it your #1 priority! In addition, you cannot get to a balance sheet budget without a cash flow forecast, so add that to your to-do list.
Create a Micro-Budget
A great tool for measuring and controlling a specific or vulnerable area is the micro-budget. The micro-budget instills both focus and accountability into your company. Micro-budgets are single focus budgets that companies use to measure and control one specific area. Some examples include:
- Accounts Receivable
- Marketing Activities
- Construction Projects
- Cost Centers
- Unique Product Lines
- Any Area Where the Plan is Vulnerable
Simplify Your Focus
Additionally, many accountants make their firms budget more complex than it needs to be. In fact, measure the complexity of your budget by four factors:
- Operational Complexity
- Diversity of Products and Services
- Size and Geography of the Organization
- Accountability to Others
- Hallmarks of a Good Budget
Have Clear AND Measurable Goals
Budgets require clear and measurable goals. Without budgets, it is very difficult to achieve the business goals because each budget defines targets and measures the progress towards them.
Connect Activities and Profits
What prevents people from controlling costs or conserving resources is that they cannot see the direct connection between their job activities and their company’s profits. Part of your job is to help your coworkers and peers see how the work they perform impacts the bottom line. You can accomplish this by involving every employee in the budget development process. Ask them what they need to better accomplish their goals, issues they are seeing, or ideas to pursue.
What Your Budget Needs To Be
You can build a prudent, predictable, and well-conceived budget that creates a visionary plan and shares resources equitably. The process has changed. It’s now a team effort! Your team needs to know the concepts and budget process because (rule #1) the budget is a tool for decision making. It should not be a disconnected document that has little to do with the company’s actual business.
A Fiscally Prudent Budget
When you produce a fiscally prudent budget, it is achievable and balanced. Also, measure it using multiple non-financial metrics. The budget should both stretch employees and the organization as a whole. While it may leave wiggle room for flexibility, the budget should establish proper reserves where needed.
Remember, a fiscally prudent budget makes an investment in the present, as well as the future. The budget does not borrow from the future to fund today! If any one of the strategic goals listed on the budget is not met, then it should not put the company in financial distress. Finally, all the decision makers, executives, owners, and employees need to believe the budget is realistic, or else it risks not being a fiscally prudent budget.
A Well-Conceived Budget
In comparison, one creates a well-conceived budget at a strategic level. It is developed in conjunction with the firm’s planning process. Furthermore, it utilizes the business acumen of an employee in the trenches. For example, an employee in the trenches is serving the customer or making the product. They are the first line of your company. They have continuous feedback built in that informs the leaders whether a strategy is realistic or not. The leadership has to be in tune with their front line. In addition, a well-conceived budget includes the interests of all the organization’s stakeholders. Then develop the budget by consensus.
In the end, a good budgeting process enables you to better manage your cash flow and adapt when needed. If you are seeking more ways to increase cash flow in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.
Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.