Eight Key Budgeting
for Your Management Team
By Gene Siciliano
Most companies with
sales under $10 million, and some much larger, don’t use budgets to
help them meet profit goals. CEOs and operating owners reason the
effort to learn how to build, and then use, a workable budget is
just too much. They seem to feel it’s more frustrating than just
hoping the numbers will all work out, if they only sell enough
widgets or services or whatever.
No need to quote
business failure rates among companies in this size range, nor the
steady stream of survey findings that say lack of good management
practices is usually to blame when a company falls short of its
potential. Instead, it would be more productive to follow some tips
to make budgeting easier. Even if you’ve never done it before, or at
least never done it successfully.
principle is that profit planning, or budgeting, is far and away the most
effective way to consistently meet profit targets and avoid costly
surprises. It helps you invest your resources to best advantage,
based on careful consideration rather than the urgency to make a
CEOs or business
owners need to decide it’s time to begin controlling the bottom line
with some of the same tools they use to control the top line.
Especially since these days the bottom line is more controllable
than the top line. Here are 8 tips for your consideration:
1) Take the
time, take the team.
A budget is not the forecast you put together on the weekend to
impress your banker. It must be the result of coordinated input and
effort by you and your top management team. That makes it a
project that requires some time and thought, just like any other
important project your company takes on.
2) It takes a little practice, like any new tool.
Regardless of how
tough it may be to estimate the future, your forecasting accuracy
will improve, and you’ll be better able to control the results,
if you actively use a budget. Practice does make (almost)
3) Any business
can be budgeted.
The only question is how much practice it takes to strike a balance
between time invested and forecasting accuracy. If you doubt this,
remember that virtually every startup business had to be forecasted
to get financial backing, including those trying to do something
that had never been done before (making budgeting even more
4) Use a Gantt
an expanded timeline – to track deliverable dates for budget
completion. As with any project management tool, it will tell you if
you’ve scheduled too much to be completed in too short a time, given
other business activities that also require your team’s
5) Don’t try to
budget to the last penny.
Accurately predicting actual results is not the objective, nor is
the creation of an immovable object. It’s all about giving your
company a direction to use for course corrections, and at the level
of detail where it matters. If you try to forecast every little
expense, the detail will drive you crazy.
6) Make the
tradeoffs when necessary.
You have a finite amount of resources available to you. If you must
spend money for something you didn’t budget, then decide what
budgeted expense can be removed to "finance" the new item. Without
that discipline, you will almost always overspend, because there
are always good reasons to spend money. They don’t always
produce more profit, however.
7) You need both
profit and cash flow targets. Every budget should have profit targets and cash flow targets,
because the two bottom line measures are very different and they
require different kinds of attention to control them. If you doubt
this, know that every year businesses with smashing profit pictures
go out of business for lack of cash.
questions to powerful results analysis. At the end of each
month, with budget comparisons in hand, ask your team these key
How are we
doing compared to budget? Why did actual results differ from the
What must we do
NOW to have a better result next month? How can we keep the
positive differences and avoid more of the negative ones?
What are we
learning that will make next year’s budget better?
If you follow these
8 tips in your financial forecasting and reporting, you will find
your income statement more informative, your bottom line more
appealing, and your peace of mind more comforting than ever before.
Doesn’t that feel good?
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