Getting to Better Budgeting: 5 ways to up your budgeting game
The very thought of budgeting can conjure up feelings of an abundance of effort for little in the way of outcomes. Ask people how successful they are when it comes to meeting (or beating) their budget and many will say “not even close”. Suggest that a budget should be prepared before getting started with a new fiscal year or venture and the response might be “we can’t predict the future, so why bother?”. And when all else fails, there’s always the familiar excuse of “nobody looks at those things anyway”. These viewpoints are more common than one would expect, but actually, they are far from accurate. Why is this the case?
The simple reason is that budgeting is a learned skill, and practice makes it better. When considered in this context, here is what the comments above actually mean:
|What They Said||Translation|
|“Not even close”||
The budget wasn’t reasonable.
We didn’t pay enough attention to the budget once it was developed.
|“We can’t predict the future, so why bother?”||We don’t know enough about our organization to prepare a meaningful budget.|
|“Nobody looks at those things anyway”||We don’t understand budgets.|
Experienced advisors know these misconceptions all too well, and the only way to overcome the challenges of budgeting and improve outcomes is to take action. This means implementing a sound budgeting process, upon which an organization can build over time. Here’s how:
- Assign the right resources: Those who are responsible for conducting the actual budget work should have relevant experience, including a professional accounting designation. Since budgeting is a specialized area, in the event that an organization’s staff members have not previously conducted budget work, the necessary training and education should be provided in advance. Advisors can also be helpful in this regard.
- Have a game plan: Developing a budget doesn’t just happen, and it’s important to have an action plan that identifies all critical activities, timing, and responsibilities. The budget should have a standard format, including an Income Statement, Balance Sheet, Cashflow Statement, as well as supporting schedules and assumptions that provide the rationale for how amounts were developed.
- Engage the senior team in the process: A budget shouldn’t be developed in isolation, such as by an organization’s leader or the “Accounting Department”. This approach can result in those on the senior team taking the view that the budget “doesn’t belong to us”. In order to avoid this scenario, all members of the senior team should be involved, by way of developing the budget assumptions that pertain to their area, as well as review of drafts and finalization. This approach gets everyone on-side, making the budget that of the organization and its team.
- Draft, review, and revise: Budgets don’t typically come together on the first try, so it’s important to prepare a draft version, review and critique it as a team, and revise where required. This process might take a few drafts, but it is rich in learning for everyone involved.
- Implement and monitor over time: A budget only means something if it is formally implemented and monitored over the full period to which it pertains. Common mistakes include developing a budget and either not formally implementing it (so people think it doesn’t matter) or failing to compare actual performance to budget on an ongoing basis. Either scenario leads to poor outcomes.
The good news is that the work is in getting started and these efforts can be leveraged over time, through re-use and enhancement of what has already been put into place. Starting now creates the opportunity to get on the path to making the process easier sooner. What’s more, the good performance that can be generated will add some distance to your game.
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