To Budget or not to Budget, That is the Question… ?

For many businesses 1st April is the start of the new Financial Year.

The end of one year and the beginning of the next is full of activity, stress, and excitement which is often driven by the business’ achievement against budget (or financial plan). So why are we so hung up on this, why do we sit up until midnight to close that last deal on the 31st March?

What if that deal would be a better one if we hung on and closed it next month? Would we be happy to miss achieving our budget for the financial year or would we close it earlier, compromising the profitability of that deal just to get it in the door?

So many times we have seen businesses do just that so they can achieve their budget, why; because the Company and the employees are targeted on it and external institutions often have expectations which drive this compromise.

It all starts with the budget, the budget sets expectations for the year.

What happens if the budget is wrong? If the economic landscape changes such that working to the budget stifles the business growth, the budget can be very restraining.

So does a budget have value?

Absolutely it does, in the main. The basic fundamentals of a budget are targets, it’s a target, that’s all it is. To get to this target we have to agree on the strategy of the business, what its goals are for the year, how it is going to grow and this is all set down in the budget.

Let’s be clear here, a budget sets out the financial targets for the coming period, 1 year, perhaps the next 5 years. It is not the Business Plan however, a Business Plan sets out the strategy for how the company is going to get there, what its initiatives are, what its priorities will be, its Marketing strategy etc. It’s the Business Plan which investors are interested in and the budget forms part of this.

It is vital to have a financial vision of where you are going, what it is you want to achieve and how you are going to fund it. Traditionally this has been the budget, but it doesn’t have to be and more and more businesses are letting go of traditional budgeting and embracing alternatives.

What are the alternatives?

It’s still targets and goals, a business still needs direction. These targets are set to empower and encourage employees to go beyond the budget and to innovate.

Let’s say your profit for Year ended March 2016 was £500k and for 2017 you want to show improvement. In a budget you would set an amount, let’s call it £550k. What if you said the target is to grow profitability by 50% over the next 3 years?

Not only does this suddenly provide a vision for the next 3 years rather than just the current year, but it opens up all sorts of possibilities for employees.

Here’s the difference:

The £550k is prescriptive and it’s the outcome of budgeting all the income and costs for the year and therefore each one has its prescribed amount. The year’s financial landscape is structured.

The growth by 50% doesn’t make any suggestion of the how or where this needs to be done; it could be increasing revenue, it could be reducing costs, it could actually be investment in tools to increase productivity, it could be anything.

There is a caution which needs to be noted here and it’s a big one. This isn’t for every business; it works in certain businesses, the traditional budget still has a place in many organisations and is absolutely the right thing for that organisation, for others the beyond budget model could work well.

A business without a budget has to have fast, reliable and effective information systems. Information has to be readily available. Decisions are no longer based upon the budget, so you no longer know that spending or income will be managed against this budget. It’s vital therefore to be able to keep on top of actuals and use projected figures and outcomes to know where you are heading. Information is key if you are going to go beyond the budget.

Has this got you thinking?

If so great, beyond budgeting can be very powerful and this blog has only touched on the subject. If you would like further information email us at [email protected]

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