Budgeting

"You can't do that - it's not in the budget!" This phrase is guaranteed to cause maximum frustration to anybody involved in trying to grow a business. For businesses in this situation, it's time to throw off the tyranny of budgeting and embrace the new concept of flexible planning. But where does traditional budgeting go wrong?

The traditional approach: completing the budget for the upcoming year
When the clocks go back is the time most business owners start to think about the new annual budget. Hopes and ideas gradually come together as figures are calculated, resulting in a reasonably detailed budget being completed by Christmas. As the Christmas parties begin, business owners relax in the knowledge that the budget contains an elegant breakdown of the sales and costs for the upcoming year and when targets are due to be met. The festive season goes into full swing as these newly printed budgets give a sense of satisfaction and a feeling of control over the coming year.

Best laid plans...
However, by the time the clocks go forward in the spring, it can look very different. That sense of control and satisfaction dissipates as actual results are compared to the budget. Perhaps sales have not quite lived up to expectations. Margins in one of the key products have been hit by that unexpected new competitor. One of the other products is gaining a good position in the market but it needs some expenditure on marketing that wasn't anticipated and therefore didn't make it into the budget. There is an outstanding candidate for the vacant sales manager position but the headcount is already over the limit set at the end of the previous year. This wasn't how it was meant to be!

Business moves fast and budgets rarely keep up
It is a sad fact of life but a budget is more than likely to be out of date virtually the moment it is completed. Business today moves very quickly and it is vitally important for any business, big or small, that its planning processes are flexible enough to move with it. Therefore every new opportunity or setback should be used review business plans and reset business goals. Maybe that salesman will land a long sought-after contract. Perhaps that merely promising product can become a key product with some marketing. Therefore, the business owner should examine the options, recheck any constraints that might exist and use the opportunity to prepare a new forecast to refocus your business priorities. By doing this, the new forecast may actually end up exceeding the original budget.

Are budgets a waste of time? Not if you use them right.
So does this mean that an annual budget is a waste of time? Maybe the once a year inflexible detailed process is, but budgets remain an excellent opportunity understand the business and re-evaluate business strategy. Budgets can also help one focus on how to use resources and identify funding requirements well in advance of their being required. The secret is to combine them with a series of regularly updated rolling forecasts that replace the often backward looking comparisons with budget, and focus on the requirement to know where the business is going rather than where it has already been.

Remember - budgets and business plans are designed to help the business - don't become a slave to them!