Budgeting-Why do it?
Many companies are starting, planning, and completing their budget process for the upcoming year. Those that are not doing any of the above are simply flying by the seat of their pants, and hoping for the best. Lack of planning allows the unexpected to cause reactions vs. being proactive and looking ahead.
Budgeting is typically viewed at as planning for the future. I take a different perspective and look at budgeting as managing the future. Budgeting is not a once a year process but a process that is used to monitor what is expected, comparing it, to what is actually happening and then understanding the differences to be able to manage the resources needed. What happens in many small companies is that they set up a budget at the beginning of the year based on the previous year’s outcomes, plan for a percent increase in revenue, make certain assumptions about cost increases such as insurance, rent, taxes, etc. and then predict their net income. What is missing from this process is the:
- Understanding of why they think revenue will increase and in what areas of the business will the revenue increase.
- Determining what other resources, human and financial, will be needed to support those revenues?
- Determining what changes in variable costs will occur, such as product costs, commissions?
- Anticipating how the changes in both fixed and variable costs affect the bottom line (net income)?
The other issue that occurs during the budget process is that each department manager will lobby for more resources, either money or people, and be adamant that they cannot do more with their current resources. Each department manager becomes very protective and maintains ownership of their territory. Sometimes they forget they are part of the whole and what is being done is to benefit the whole and not necessarily one department. They will assert that everyone is working at maximum capacity and more resources are needed for their department to meet the projected revenue goals. If more is really needed , then less of the increase in revenue will be available for growth and less will be in the net income line.
The budget is a plan for owners to look at the big picture, understand why they made the assumptions they did, understand the metrics of the goals they have set down for the coming year and, if reasonable, go for it. Owners should not get sidetracked or be manipulated by others in the company that have personal agendas.
For more information and help to grow your company contact The Shnider Group at email@example.com or call Neil Shnider at (614) 582-0108 for more strategy and growth information and tools.
Neil Shnider, MBA, CPA, is a special projects consultant that focuses on organizational growth through finding new markets and new products/services, increasing revenues and trimming costs, for the Small Business Development Center at Florida Gulf Coast University. Neil is a full time resident of Bonita Springs and a certified consultant for the Patient Protection Affordable Care Act (Obamacare).