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Five Ways to Improve Business Budgets

Posted by Michael D. Machen, CPA, CVA on Dec 9, 2016 8:39:55 AM

iStock-619087604-079656-edited.jpgStrategic planning for the coming year

Do you know where your business budget is?

This is the traditional time to draw up a budget for the coming year. Perhaps the way you previously developed the budget for your business has not been overly successful. Or maybe you have found as the year goes along that certain key factors were ignored or not given enough weight. In that case, the way you usually put together the budget may not be the best approach for your business.

Possible solution: Take a long, hard look at your process. Is it accomplishing all the objectives you hope to meet, including strategic planning, resource allocation, and performance and compensation evaluations? If not, change may be required. Here are five suggestions to consider:

  1. Become more dynamic. Important business decisions should be based on a realistic business plan. However, the traditional annual budget can quickly become obsolete when certain assumptions prove to be wrong. You need to move quickly to revise the budget when warranted.

    For many firms, a quarterly review will not be sufficient. When significant factors—such as interest rates, fuel costs or direct competition—change, you may need to adapt on the fly. Build this flexibility into your budget.

  2. Allocate and react. Initial allocations are difficult, but once made, they do not have to be etched in stone. If more resources are needed, you should not be constrained by the budget. Additional budget allocations may be allowed during the year.

    When an in-depth review is not feasible, you might ease some financial constraints. If you have good people in place, you need to trust them to make sound decisions without your micromanaging the situation.

  3. Do not focus on performance evaluation. Usually, it does not make sense to judge performance based on target numbers and principles that have become outdated. Furthermore, basing pay on budgets that the managers set for themselves encourages them to lower expectations to better their chances of meeting their goals.

    If possible, keep performance evaluations separate from the planning processes. Managers should be judged on how their units actually perform during the measurement period.

  4. Develop other metrics. Financial results do not have to be the only measuring stick for business units and their managers. You might supplement the financial measures with metrics specific to each organizational segment, some of which are leading indicators of future financial performance. Depending on the operation, these could include attaining significant new clients or customers; success in research and development; or improvements in production, customer satisfaction or employee morale.

  5. Revise your assumptions. Frequently, budgetary goals are based on exceeding a threshold, so bonuses may not be paid if the goal is not achieved. This arrangement encourages managers who could be denied a bonus to manipulate the results. If your company shies away from this approach, there will be less temptation to “work the system” and greater emphasis on doing what is best for the company.

In summary: These five steps may create an environment conducive to growth and sustained success. Managers can make better decisions based on updated information. Budgeting will still be time-consuming, but it should be time well-spent.

For more information on the above article or information around business advisory services contact Michael D. Machen, CPA, CVA at (334) 887-7022 or by leaving us a message below.

Topics: Business Advisory

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