Budget Planning: Tips for How Managers Need to Approach Their Budget

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Planning Your Budget

If you are a manager whose responsibilities include maintaining a budget, I feel your pain. I’m pretty sure that the one thing that brings managers of all types together is the universal pain, headaches and aggravation introduced by budget planning.

As I near the end of my own budget planning cycle, in preparation for next year, I find myself both excited for the opportunities coming to my team, as well as exhausted by the process that I’ve had to endure for several months now.

Somehow it starts late every year, resulting in a sudden mad dash to collect the data, the projects, the expenses and other necessary cost figures in order to compile the first pass budgetary outlook. And for the ensuing months, rapid fire emails are traded with priority as part of a prolonged process of negotiation, planning and aligning assumptions.

Fundamentals of Budget Planning

If you have not had the opportunity to plan a budget, there is no need to be jealous. But just in case, here are some of the basics of the process.

The budget planning cycle is the repeated process through which organizations outline their financial objectives and commitments. Typically this process is done on an annual basis, although different time scales are possible.

A common misconception of budget planning is that the budget simply outlines how much an organization is going to spend. While financial spend is indeed a very large portion of the plan, the budget planning cycle consists of the comprehensive meshing of things like revenue, cost reduction activities, depreciation of equipment, economic assumptions and a bunch of other financial elements. The roll up of all of these numbers ultimately translates into a prediction of profit; thus, a better description of this process as used by many organizations is profit planning.

The Basic Steps of Building a Budget

Though my experience of profit planning in a perpetual state of panic may be a bit extreme, the process is usually the same for most organizations.

Step 1: The first step in the profit planning process is the define the expect activities and needs for the given period.   This step usually requires the need to make assumptions pertaining to the amount of new business to be awarded, planned improvements to the company or department, and various other costs necessary to run one’s team. If you are a newcomer to the joys of profit planning, here are some questions you should try to answer as you get started:

  1. What projects or activities that are currently underway do I expect to carry over into the next cycle?
  2. What new projects or business do I anticipate, and what is needed to support them?
  3. How many people do I need on my staff to ensure we take care of customers?
  4. What improvements do I need to make within my department (such as equipment, materials, software, etc)?
  5. What costs should I plan for in terms of employee activities (travel, professional memberships, etc)?
  6. What costs will be associated with developing my employees (training, courses, etc.)? (Note: I always assumed $3,000 for each employee to attend a professional seminar or training course, including anticipated travel costs)

Step 2: Once you can answer these types of questions sufficiently, Step 2 is when you consolidate the data into some sort of master list that is compiled at higher levels within the organization. This roll up helps paint the initial financial outlook of the company.

Step 3: Other high level financial objectives (total profit, sales, etc) are defined for the company as a whole.   For most larger corporations, economic data is usually carefully examined in order to predict macro level trends in terms of what the company can expect of the business environment. For example, if your data suggests that your industry will grow by 4% next year, it would be reasonable to predict your top line sales to increase by a similar amount if you continue to do what you’re doing. Additionally, the business may want to invest $100,000 into a project that will save $1,000,000 over the next years. Smaller companies may not get to this level of detail, but still will usually have some notional financial, as well as strategic goals in mind.

Step 4: Upon consolidating all business activities into a single master list, the ‘haircuts’ begin. The rolled up budget is compared to the higher level financial objectives, at which point gaps and differences must be addressed. For instance, the business may challenges its managers and sub-units to achieve more cost reduction that initially estimated. Various expenses and projects may be added or removed to the list of activities.   And of course, changes in staffing levels will be closely evaluated.

Step 5: The process continues in a manner similar that described in Step 4. Over the course of these iterations, the company or organization slowly converges onto its planned financial outlook for the next cycle, such that resources are aligned to the strategic goals of the organization. Once the profit plan solidifies, typically approval by the top part of the organization is necessary before anything becomes official and ‘in the plan.’

The Two Rules of Profit Planning

While the profit planning process may seem fairly simple at a high level, the details and strategies that go into it are significantly more complex.   The results of the process are of course the budgets and activities that managers are expected to deliver to the company in the specific financial period.

I’ve been through the budget planning process more times than I want to admit. And while each organization does it slightly different, the process by which they establish a profit plan is generally the same. That said, in addition to the basic steps I’ve outlined above, I have been able to boil the results of the process down to two specific rules which managers can expect, neither of which will be found in a textbook or MBA program.

Rule #1 of Profit Planning: There Is Never Enough

The first rule of budget planning, is to expect that you will never have enough. You need to prepare yourself for the fact that in most cases, your desire to add three new people to your staff is unlikely to happen. Further the amount of funds you seek in your initial budget plan for things like training, travel and other expenses is unlikely to hold. And you may have to go another year or two before you can get that shiny new coffee machine for the break room.

As frustrating as it might be to many managers, the financial plans outlined by companies are typically conservative in terms of spend, but aggressive in terms of sales and profit. Companies that fail to compile realistic and responsible financial plans typically find themselves in difficult positions. If they over-committed on profit and cash flow, the business will find itself cutting less-important activities in the middle of the cycle in order to ‘hit the numbers.’ (things like training, travel and other expenditures that do not improve profit are usually the first to go). If the company was over aggressive with its spend in order to reach some desired goal, it may have to slow down its spend rate and push out its goals.

Rule #1, therefore, is that resources are typically going to be scarce, no matter how well a company prepares it’s budget. As a manager, you need to prepare for it and watch closely as time goes by.

Rule #2 of Profit Planning: You CAN Get What You Need

Despite what Rule #1 says, Rule #2 will tell you that you CAN get sufficient budget to get what you need, even if less than what may be ideal. But to get this point, it takes a little more planning and up front work. It’s important to go into your profit planning cycle with a gut feel for what you need. What are your key challenges? If you had to choose a critical few things to make sure are included in your budget, what would they be? It is important to be realistic with your expectations. But as a manager, it’s also your responsibility to run your team as best you can. If your computers are simply old and are hindering productivity and efficiency, that sounds like something you should push for very hard. If your employees are in critical need of some new software or training, put that business case together. If you really need more people, get some data together to help justify a need. One of the biggest mistakes I see other managers make falls into the category of poor planning, and lack of forward vision. It takes a little more effort on your part, but the extra time you put into evaluating your needs, the better.

Here are some tips on budget planning that I’ve learned in my career, which have helped me gain sufficient budget that helps me get things done without the need to extensively cut costs:

Don’t Let it Sneak Up On You – Profit planning is important, period. For most managers, it shapes their personal ability to spend, support the team, and his or her all around ability to get things done for the next year, or whatever your planning cycle might be. Aside from major changes in the business (such as winning a major contract, or sudden economic challenges), firm’s will rarely venture far from their plan once it’s set. For this reason, it’s important your plan is well thought out, comprehensive and clear.

Gain Buy In From Team Members – Managers who prepare their profit plan in a vacuum are doing themselves a disservice. Although managers are responsible for maintaining and achieving results in line with their budget, it is unlikely that he or she is 100% in tune with everything going on at all times. Before you submit your budget numbers for evaluation and roll up, hold a review with your key employees and stakeholders. Your most trusted employees will probably be able to help you refine and justify your numbers and well as identify things you may have left out. Your employees are closer to the work, the challenges, and opportunities than you are. Use them as a source of information and support when preparing your budget.

Over Plan At the Start – The first thing that people associate with the word budget is budget cuts. Personally, I’ve never seen an initial budget proposal that wasn’t trimmed, adjusted, challenged or otherwise cut. For this reason, it’s important for managers to plan for their submittals to be challenged. I always expect for some level of challenge and therefore include some initial low priority items that I can later offer up for cutting.   It may seem a bit off-putting, but I would rather be in a position to trim some low-priority projects in order to preserve the vital few, than have to choose between important projects and needs.

Sell Well – If you are a manager compiling a budget for submittal, it is important that you can articulate what you need and why you need it if you are asked to do so. Although you should expect some level of push back, or challenge from senior leadership, you can do yourself a world of favors by being prepared with supporting data, evidence, and consequences than if you do not have such data. If an executive were reviewing your budget and your only reason for spending $40,000 on equipment is ‘to upgrade the conference room’ you might find yourself with only $10,000. If, however, your rationale is something more substantial, like lost productivity due to the conference room projector repeatedly breaking down, you might be more successful.   Be ethical, be reasonable, but be prepared to justify your needs in detail.

Budget Brings Responsibility – A word of caution: there are limited funds and resources within every business. While you need to ensure you have enough budget and flexibility in your profit plan to get things done, those resources come with the expectation that you will deliver on those commitments. If you are unable to deliver on these commitments, you can expect your budget to be trimmed in the follow on financial planning cycle. After all, in the eyes of an executive, that $50,000 you didn’t use or went to waste on a bad project will likely be invested elsewhere in the next go around.

So the next time you’re preparing a budget and profit plan, be sure to follow some of these tips. Budget planning is important and how well you do it is likely to have a direct impact on your ability to manage your team effectively in the next year.   Remember, once it’s final, it’s final.

If you’re struggling with how to compile your numbers for the next budgetary cycle, contact us and let us know how we can help.

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