Few practices in the business world inspire as much stress and frustration as the annual budgeting process. Managers dislike the time-consuming process, executives hate hashing out conflicting goals, and finance professionals are tired of the endless iterations. It’s not surprising then that some companies fail to budget at all. Despite these complaints, budgets are useful tools for holding business units accountable, reducing costs, and making effective decisions. But don’t scrap the process altogether.
5 steps for building a bulletproof business budget
#1. Start with accurate financials
Most budgets start with a look at actual year-to-date results, so ensure your financial statements are accurate. Missing transactions and misclassifications, whether caused by carelessness or lack of information, can lead to costly issues when the company relies on wrong numbers to make decisions.
(Hint: QuickBooks Online has a budgeting feature that lets you allocate dollars for each account on your profit and loss statement!)
#2. Align resources with strategic goals
Budgeting is not merely a financial exercise. It helps to ensure the company uses its financial resources to further its goals and priorities. Rather than spreading resources evenly across business units or budgeting based on last year’s numbers plus inflation, allocate resources strategically. Start by fully funding the business units that are the top drivers of profit and growth and those that align with the organization’s strategic goals, then move down the list. Those at the bottom may not like the results, but when you link budgets to strategy, managers and employees gain a clearer understanding of – and support for – the company’s goals.
#3. Build flexibility
Static budgets are useful for producing high-level financial targets. However, they don’t allow organizations to respond to threats, changing market conditions, or unexpected opportunities.
Build flexibility into your budget by setting aside funds at the business unit level. These funds can be tapped to respond to changes that couldn’t have been anticipated during the annual budget-making process. This prevents business unit managers from padding their budgets “just in case” and results in leaner, more realistic budgets.
#4. Remove excessive detail
More detail doesn’t necessarily lead to better decisions. In fact, too much detail often causes the budgeting process to be more time-consuming and prone to error. Rather than drafting a cumbersome budget that includes line items for every expense category in every business unit, identify and track the three to five factors that have the most significant impact. For instance, a consumer products company may monitor sales volume, marketing spend, and the cost of key materials. This is a more straightforward way to arrive at how money is being spent and the value it’s generating.
#5. Automate your business budget process
Many companies manage their budgeting process with spreadsheets. This is and clumsy way to budget, often leading to inaccuracies and lack of consistency. Look into automated solutions that integrate with your existing technology stack. This saves time and improves accuracy because information can be pulled directly from the general ledger rather than being collected and consolidated from multiple sources and manually entered into a spreadsheet. Automated solutions also provide forecasting and report modules that cannot realistically be programmed into a spreadsheet.
By following the budgeting process outlined above, your company can gain greater insight into its future health without adding unnecessary burden to your finance and operations functions. It’s a budgeting process that is practical to implement and use throughout the year. The result will be a trusted tool providing the insight and intelligence needed to drive the decision-making process quicker and with greater confidence.