Business Budget – A Simpler, More Effective Approach

Hearsay, you may shout! How can I possibly run my business without a budget? Can I hold managers accountable? How can I reward and incentivise my staff to perform?

And, most importantly, how do I measure my financial performance on a monthly basis? All these are very valid questions, but an annual business budget is not the best financial management tool to achieve this and can drive limiting behaviours.

What if I were to say there is a better way. A way that improves financial performance and increases employee engagement. This way is known as Beyond Budgeting.

Let’s remind ourselves of the 3 core objectives of any business budget:

1.       It sets a target i.e. what we want to happen
2.       It acts as a forecast i.e. what we think will happen
3.       It’s there to allocate the company’s resources i.e. capital expenditure

A business budget is both a target and a forecast. How can one number be both things?

A budget sets a ceiling on performance, once it has been met what is the motivation to keep going? After all, you are only going to get a bigger target next year. “A new survey from Clutch just revealed close to two thirds or 61% of small businesses don’t have an official documented budget”. smallbiztrends.com

A budget sets out fixed costs with a plan of how we intend to get to our destination and it also allocates company resources accordingly. The world never ends up being how we planned it, so why do so many of us continue to follow – and stick to – the budgeted plan that is now out of date?

Many businesses witness a drop, both in employee performance and their motivation levels just because a large customer went bust during the year. This sees them losing any hope of commissions or bonuses just after the first quarter and you don’t need to be an expert to understand that this is not good for business.

These conflicts that arise due to budget conflicts need to be resolved as they can cause serious disruptions. We can resolve them by separating them and having different management processes.

Setting a small target that will take 12 months to achieve is not ambitious enough. Why not reach for the stars? If the target is met in 12 months maybe it wasn’t ambitious enough. If the target isn’t ambitious enough, you give yourself very little chance to achieve big things.

The world outside our businesses does not beat to the sound of our company’s financial year-end. Many of the important business decisions are made in the last few months of a financial year to hit a budget number, that was set 15 months earlier. This lack of strategy shows the ineffectiveness of business budgets as the only means to measure performance.

Often these decisions cost the business in the subsequent months. Time is a continual line; we should manage our businesses in the same way. The numbers that we make budgets for, get added up every 12 months (the previous year) to pay business loans, not to manage decision making.

Wondering how you can make better decisions in the light of the numbers that your business generates by not being dependent on a budgeting worksheet that you keep on following every year? You can do this using rolling 12 forecasts. Using this technique, you can forecast what you believe will happen in the next 12 months. Every month, you renew this and plan for the coming 12 months without limiting yourself to a specific period.

This helps you in understanding if you are closing the gap on your target or are you going away from it. If you’re closing the gap, keep repeating what’s working, if you’re drifting away, try something new. Measure, report, assess and repeat, never stop seeking to improve.

Allocate cash flow based on the opportunity, as it arises. Empower management to make decisions that improve customer service, delivery and seize the opportunity when it arises. Simplify decision-making for resource allocation and keep the process simple and easy. It does require rigor – just enough to make sure everything’s well thought through.

Lead your business by establishing clear values, goals, and boundaries. Delegate responsibility to those closest to the customer; give teams and management autonomy and freedom to act.  Promote transparency. Bad news is to be shared openly, so the remedial decisions can be made quickly.

Create bonus pools, not individual targets. You want everyone in the business pulling in the same direction.

The process of how small business manages its financial decisions is a culture driver. By managing your business using the above processes, it will change the culture and drive performance and increase employee engagement, improving staff retention and customer satisfaction. A happy employee is the most important step that leads to a happy customer.

So, let’s go beyond budgeting and business budget templates to break the glass ceiling that these budgets set and unlock the potential of your employees and their abilities.