Budgeting Best Practices
Dwight Eisenhower once said, “Plans are worthless, but planning is everything.” The lack of clear objectives can prove highly damaging to an otherwise-promising organization. Corporations employ budgets to keep themselves on track in their efforts to achieve ambitious yet manageable goals. Of course, no company will ever precisely mirror a budget’s specifications, however that is not the budget’s goal. Rather, effective budgets serve as a performance roadmap, empowering leadership to regularly measure progress while allowing for adaption and flexibility. The following budgeting best practices can help your organization leverage its resources to its fullest:
- Set Clear Goals
Budgets maximize value when they serve to track performance on a micro level rather than merely reflecting overall strategy. To track performance in this manner, you might want to consider employing the S.M.A.R.T. Goal Framework. That is, set goals that are Specific, Measurable, Attainable, Realistic and Timely for each business unit. A general rule of thumb is to shoot for 80% confidence for each goal. The 80% percent benchmark is aggressive enough to encourage productivity and attainable enough to maintain enthusiasm.
- Communication is Key
The budget design process should incorporate the entire organization, not just management. In fact, it is a great opportunity to promote alignment across your organization and ensure that everyone is clear about your company’s priorities and direction. This approach invariably leads to greater support for goals, better coordination of tactics, and, ultimately, to stronger companywide performance. To this end, consider using an online tool like QuickBooks, which can be centrally accessed by multiple team members, rather than a single-user program like Excel.
- Design Budgets that Accommodate Change
It cannot be overemphasized that no budget will precisely predict your organization’s performance. It is therefore crucial to deploy a budget that can adapt to changing circumstances. Flexible budgets free managers from padding their budgets and allow for leaner, more realistic strategies. Remember, a budget is just a roadmap – it is not designed to be set in stone. Develop a budget that accommodates change so you can respond to threats and shifting market conditions quickly and accurately. Consider using a rolling budget, wherein you make a broad assumption early in the year that you periodically update, focusing and refining it to better align with your goals.
- Tie Incentives to Budget Targets, but not Only to Budget Targets
Some managers succumb to the temptation to tie bonuses and other incentives solely to meeting budget targets. While meeting targets should certainly be a factor in awarding bonuses, it is important not to get too lost in the details. Rather, it is crucial to remain aware of your organization’s overarching strategy and allow for non-financial performance measures. Successful companies use a balanced set of performance measures to chart progress toward strategic goals and use the same measures in their incentive programs. This reinforces the importance of key strategies and communicates what results will be rewarded.
- Hedge Historical Data
Overreliance on historical data and failure to adapt to industry shifts and emerging opportunities can prove detrimental to your bottom line. Clearly, past data is the richest resource to draw upon when designing your budget. That said, exceptional companies have the wisdom and foresight to allow for market changes and technological innovation. Remember – budgets are not static, they can always be adjusted.
With the right planning and a little creativity, you will be well on your way to designing a budget that will maximize your company’s operations and profit margin.