It’s the time of year to plan and budget for 2017. We’ve all been through this process before. The importance of a budget cannot be overstated. It provides guidelines for expected income and expenses, it allows you to compare your anticipated financial goals with actual numbers, and it serves as an indicator for how your business is performing. It also allows you to plan ahead and determine what changes, if any, should be considered.
Jason Green wrote an article in Harvard Business Review providing four practices to make the budget and planning process more effective and less dependent on illusory projections.
Four Tips to Build Next Year’s Budget
Plan meetings in advance and make clear any kind of projection needs to be supported by facts. Green says key assumptions behind projections must be detailed. He adds, the meeting should focus on a structured discussion but you also want to leave adequate time for dialogue and questions which can take the discussion in any direction.
Build the Case
Green suggests you take each business unit starting from the market demand, and work back to internal costs, capacity, and capability measures. Go beyond the “what’s” and start providing the “whys.” Green says to ask yourself these questions:
- Why is demand projected to increase or decrease?
- Why will we get more than our fair share of the available demand?
- Why are customers buying in the first place?
Complete your analyses before working on the actual budget. Once you’ve established market demand and key drivers, then start a discussion about your supply, cost position, and capabilities.
Green says, “Bringing both the demand and supply elements of the equation together provides the input for more informed decisions while avoiding the pitfall of assuming demand is a ‘given’ that requires little or no discussion.”
Define the Strategy
Take the role each business unit plays in the grand scheme of things and define the strategic role for them. Green suggests you use a 2×3 “Portfolio Matrix” for which the horizontal axis is “Growth Potential” and the vertical axis is “Economics.”
Whether you use the “Portfolio Matrix” or not, each role should be clear and transparent to everyone. Also, they should understand the role, how it was determined, and how it can change.
A lot of businesses use a horizontal approach, which means resources are spread evenly throughout their business units. Green says the actual resource allocation should be done vertically rather than horizontally. This means resources will not be spread evenly and will not just reflect last year’s budget plus inflation.
You need a budget in place to plan ahead, prioritize your distribution of funds, and measure if your financial predictions are met. It also allows you to make decisions in order to improve your business operations with clarity and efficiency.
What tips do you have to build a better budget?