Having a budget – fully aligned with operational targets – is important, but it’s of limited use unless you update it regularly to reflect what’s happened so far as well as new emerging challenges or opportunities.
I’ve recently being working with a small business which established a budgeting and financial reporting process a couple of years ago. The executive team had become frustrated with this as they felt it was something required by the board, lenders or other stakeholders but of very limited use to them.
‘It’s out-of-date and doesn’t reflect what’s happened so far in the year or our need to react to new challenges’, was how one of the team put it.
Together we looked at some ways to address their concerns and turn the process into something that’s a useful management tool, not just a regular headache.
Communicate Early & Often
Budgeting and forecasting should involve every part of the business, so you need to keep an open line of communication with all functions throughout the entire process to help minimise issues and to ensure alignment between your company’s operational and organisational strategies.
Involve the Entire Team
Budgeting and forecasting should be a team effort so that each function has a clearer understanding of their own needs as well as those of other areas of the business.
Moreover, using your entire team allows you to have multiple perspectives on where your business is now and where it could be in the future.
Be Clear About Your Goals
The purpose of forecasting is to predict your business’s financial future. Forecasting aids in the making of business decisions and in understanding their impact before you implement them.
If you aren’t clear on the overall goals of the enterprise, then your ability to accurately forecast your business’s financial future falters.
Therefore, you should have a clear understanding of what’s driving your forecasting predictions; otherwise, they are just random guesses not grounded in the goals of your company.
Budget to Your Plan
Make sure your operational targets (KPI’s) align with the financial plan.
Budgeting to your plan “requires that spending decisions be made based on actual revenue, rather than on opportunities that such spending might (or might not) lead to.” Instead of spending and dealing with it later, budgeting to your plan forces you to deal with the potential impact any expenditures will have on the business.
Implementing this method of handling your budget is really helpful in addressing opportunities that weren’t a part of the original budget.
Keep Budgeting and Forecasting Flexible
Rigid forecasts and budgets aren’t very useful. Things change as the year progresses, and you need to be able to factor in those changes and how they will affect your business.
Continuing to base decisions on the best guesses made months before the year even started can lead to faulty and costly decisions.
In addition, holding employees to metrics based on out-of-date information is counterproductive and frustrating. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results in your business.
DHKN’s Corporate Finance and Outsourced Accounting teams work with business at all stages of development helping them prepare and maintain financial as well as operational plans which can include actual performance and updated projections, to help your business become more agile and adaptable.
For an informal discussion with our experts about how we can help your business match your ambition, contact me at dhickey@dhkn.ie.
