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Towards a Better Budget
Budgeting is part of good
management. No business can expect to succeed unless it has a plan for
expenditures that is related to its revenue estimates. Companies that
spend more than they earn won’t be in business long.
But businesses generally have a number of budgets operating
concurrently. There are budgets for categories like stationery and
marketing that are not apparently interrelated, although collectively
they become part of the organization’s annual budget.
Each of these ‘subsidiary’ budgets needs to be set according to the same
set of principles, and each should take projected revenues into account.
Budgeting is an essential requirement for effective financial planning
and those planning budgets at all levels have a lot to keep in mind.
Every Budget Needs Objectives
Expense budgets must be framed within specific parameters and targeted
to achieve objectives that are compatible with overall corporate goals.
There’s no point in massively overspending on entertainment when
revenues are in free-fall. Objectives at times of decreasing income must
be scaled back to reflect revenue expectations.
Capital expenditures must also be closely related to overall corporate
objectives. Having excess manufacturing capacity is worse than having to
subcontract manufacturing outside if an unexpected order arrives. It
would be better to allocate funds toward gaining new business rather
than have it tied up in unused facilities.
Identify all the Costs Involved
Budgeting for a new item of equipment takes more than just finding out
the cost of the machinery itself. New machinery requires operator
training, installation and maintenance costs, as well as running costs
including power or fuel. All these on-costs can add up to substantial
sums and if they’re not anticipated in the budget they can become huge
problems on their own.
This can also affect areas such as marketing and sales where an increase
in activity can involve greater expenses to handle enquiries or provide
information. The costs of setting up a website as part of a consumer
promotion are almost universally underestimated.
Going Up – and Further Up?
Costs will increase, and the only question is ‘by how much?’. Budgets
that don’t take into account the real rise in the costs of doing
business will prove inadequate. Using Treasury forecasts, as some
government departments have to do, is no way to ensure that the price
rises are accurately predicted.
There are different rates of increase for different categories of
expenses. Healthcare, for example, is rising faster than the cost of
paper, and wages are increasing at a slower rate than the costs of
electricity. It’s a smart idea to contact at least all your major
suppliers to get an idea of their expected increases when preparing a
budget; simply applying the same percentage increase to all outgoings
won’t work.
One Budget Affects Another
A major marketing campaign that generates a flood of enquiries and lots
of new business will also mean an extra load on other departments, from
complaints handling to deliveries and shipping. It’s essential that the
consequences of activities in one area are anticipated and provided for
in the budgets of other areas.
Transference of expenses is another factor to consider. An increased
maintenance budget may well be unnecessary if older equipment is
replaced with new machinery. Similarly, an increase in personnel will
also require an increase in other areas such as training and office
facilities.
Anticipate the Negative Effects
One aspect of increases that’s often overlooked is the negative impact
of growth. An increase in sales will also result in an increase of
product returns and bad debts. Growth in sales is usually accompanied by
growth in expenses as well, and this needs to be considered when
budgeting for bigger revenues.
There will also be costs that arise unexpectedly – whether they’re
caused by taking advantage of opportunities or by disasters that weren’t
forecast. Firms that install new hardware or software should also
provide for their failure, or at least for some downtime while they’re
being settled in.
Flexibility is Essential
Successful budgeting isn’t about getting it 100% right from the start
and then not making any changes over the term the budget operates. All
good budgets are flexible enough to cope with change, handle problems
and make the most of good times as well as downturns.
Teamwork and cooperation between all those involved in planning an
organization’s budget will go a long way toward delivering the optimal
outcomes. Monitor actual income and expenses against the projections and
be ready to reallocate funds as necessary to meet overall corporate
objectives.
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