Budget Strategically to Stay on Course

August 28, 2008Tim BerryContent provided by Entrepreneur.com

Budgeting is probably the least-loved business management tool. Even the word "budget"brings to mind disapproving accountants and denied requests. And how often have we heardthe phrase, "it's not in the budget"? Nevertheless, budgeting is one of the most valuabletools in your management arsenal.

What Do I Get Out of Budgeting?Let's look at what budgeting can do for your business: Budgeting puts the money wherestrategy's mouth is. I call it strategic alignment. Spend money on strategic priorities.

It sounds obvious, but during more than 30 years' working with businesses of all sizes thatare trying to grow, I've seen them do just the opposite: They talk about priorities when theyget together, but spend on other things entirely. For example, I worked with a company thatintended to emphasize customer service but spent nothing on employee training, moreemployees or better-quality items to sell.

Budgeting Means Taking the WheelThe next question is: How will I know whether I'm actually addressing priorities in myday-to-day operations? You think it's obvious, but I've been there: The phone starts ringing,fires need to be put out, days and weeks and months go by.

With the budgeting process, however, you can turn to the numbers and see how yourspending breaks down into categories. Compare that to your original budget. Now you havea tool to track your progress and, of course (here's where the management comes in), makecorrections.

Budgeting is Precaution, Safety and Risk-ProofingDuring a StormIf the economic news spells a recession, we all run to our budgets to prepare for the storm.If sales go down, we need to recognize it quickly and identify possible course corrections.Usually that means watching expenses. That's all budgeting. Budgeting is about process, notjust numbers.

So that's how I look at budgeting: It's a process, not just a budget. What's really importantabout budgeting--and where you get the real benefit for your business--is in completing thefull process. That means you develop a good budget for the beginning of the year and thencarefully manage changes--budget plan vs. actual budget--throughout the year. Here arenine tips to help you develop a good budget:

Your budget will be wrong; all budgets are: Budgeting means guessing thefuture--and it doesn't have to be an accurate guess to be vital to management. If youdon't have a budget--even if it's off--you can't work with it to correct your course.

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The review process is absolutely critical: It isn't the budget itself that makes thebudgeting worthwhile. It's the review that comes regularly, focusing on what'sdifferent from the budget. That means comparing budgeted expenses to actualexpenses.

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The most important single point is the review schedule: Never finish a budgetwithout setting a schedule for budget review. That means when, where and who willattend the meeting. As my company grew from just me to 40 employees, we set up aregular budget review the third Thursday of every month, giving us enough time toclose the month. It doesn't take long. We bring in lunch and we're done by 2:30 p.m.Budget review is a powerful management tool. Bringing your people together to workon the budget builds an automatic peer process, pride in the performers and incentivefor those who can do better.

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Keep the assumptions visible: The first agenda item in the review meeting is tolook at the assumptions. What's changed? How does that affect our budget? We live inconstant change, so good budgeting keeps the change where we can see it and

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constant change, so good budgeting keeps the change where we can see it andmanage it. Sticking to a budget isn't necessarily the best course. Managing a budget,by seeing how assumptions have changed and correcting the course, is better.Keep it simple: Try to build the budget so the information that comes out matchesthe people responsible as much as possible. Keep it summarized so you can see itwell. If you divide the information into lots of detail categories, all you see is thetrees, and management requires seeing the forest. Build it so you can summarize andaggregate.

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Tools, tools, tools: You may be like me, in that one of my weaknesses is that I getlost in the tools--the accounting software, for example, or the managementdatabase--when what really matters is the human process, the discipline to do thingsright. Just in case that's true, let me offer some battle-scarred tips about the tools:

Your bookkeeping software isn't the problem. There are lots of competent softwaretools that help you keep track of the money and manage the budget. Some are betterthan others, but the best one for you is whichever one works with easy data exportfrom your bank.

Usually banks offer two or three options for data links. Let your bank do the heavylifting of data entry. I've worked with Quicken, QuickBooks, Microsoft Money, Accpacand several versions of Sage and Peachtree. Right now my favorite is Netbooks. Butthe software isn't the problem. If your software doesn't talk to your bank, look intothat and consider switching. If it does, then software isn't your problem.

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Match your accounting reports to key management items: It's called chart ofaccounts, and what it means is setting up categories that match control andresponsibility, and the information you can manage later on. Accounting is going to bevery detailed, but budgeting and budget management need summaries of categoriesand more aggregation.

Set up your budget so you can see strategic priorities. For example, in my companywe needed to view sales by product and by channel, so we built the chart of accountsto categorize sales by product and channel. I worked with a coffee shop that neededto see sales broken into general categories such as drinks, food items andaccessories. If that's what you need to manage, then set up your bookkeeping to showit.

As another example, break expenses into areas of control, like who's responsible,rather than type of expense. We have travel broken into upper management travel,sales travel, marketing travel and product development travel, because we wantvisibility for the specific people in charge of sales, marketing and productdevelopment. And that's a company with 40 people, not 4,000.

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Consistency matters, regardless of tools: Do as I say, not as I've done. Someyears we keep switching categories in the budget, trying to get better visibility. Thoseyears we typically have less information because we can't go back to the past. Whenwe stick to our categories over time, it's easier to see trends.

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Do the above.You'll be glad you did: Good budgeting brings your words and yournumbers together. This is what you need to control and steer your company towardthe future you want. The alternative is haphazardly reacting to events--essentiallydrifting. Good budgeting lets you control your destiny. Make no mistake: Budgeting isone of the keys to management.

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Tim Berry is the "Business Plans" coach at Entrepreneur.com and is president of Palo AltoSoftware Inc., which produces the industry's leading business planning software, BusinessPlan Pro, as well as other popular planning applications for businesses. He is the authorofThe Plan-As-You-Go Business Planpublished byEntrepreneur Press.

http://www.entrepreneur.com/startingabusiness/businessplans/businessplancoachtimberry/article196700.html

About This ItemCategory: Financial ManagementSubcategory: OverviewsKeywords: Budgeting, Financial Planning, Financials

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