- Posted by CFO One
- On June 26, 2019
It’s that time of year where proactive accountants are working on next year’s budgets with their clients. Budgeting is an essential part of any businesses’ forward planning activity. We believe budgeting is so important, its compulsory for every one of our business clients.
Budgets give business leaders a benchmark to measure success against. If at the end of the year the business has achieved its financial budget, it’s a good indicator that the management team has successfully executed the businesses’ strategic goals that year.
To help you get started on next year’s budgets, we decided to share our favourite budgeting tips & insights from the CFO team….
- Set business goals. Think about your business in 3 years’ time… what does success look like? This could include things like a certain level of turnover, profit, number of staff, etc. Once you’ve got your 3-year picture, work backwards to develop 12-month goals including revenue and profit targets. Most importantly, write your goals down and use SMART goal setting principles. Research has found people who write down their goals are over 60% more likely to achieve them.
- Communication & Accountability: communicate key numbers from the budget with your team. Make members of the management team accountable for the key numbers. For example, a sales manager could provide input in setting sales budgets and then be made accountable for sales performance against budget. Communicating budget targets with the broader team helps staff understand the businesses direct and can help keep motivation high.
- Monitor performance against budget: part of any businesses lagging financial reporting needs to include monitoring actual performance against budgets. Most accounting software now makes inputting & tracking budgets easy. In our experience, business leaders who regularly monitor and forecast performance against budgets and involve their management team in this process have a higher chance of achieving performance targets.
- Budgets don’t change: most of the time we recommend not changing budget numbers after the annual budget has been set. Where expected performance differs from budgets, this should be tracked in a separate financial forecast. The exception to this might be where a substantial change in business structure or operations has occurred during the year, eg. acquiring a new business.
Budgeting for your business can be an incredibly motivating exercise when combined with a goal setting mindset. It can help identify any gaps in an organisation’s ability to execute on its owners’ medium and long term vision and gets the management team aligned and accountable for key numbers. Budgeting can be as complex as you want to make it, but the first step is to start somewhere – it probably won’t be perfect first time around but over time you’ll be amazed at how accurately a good budgeting process can predict future performance.
Michael McManus April 2019