A budget plants an iron rod of confidence and accountability into the spine of your business.
I recently blogged about Six Ideas for Setting Successful Budgets:
- Budgeting begins with assessing the current business environment
- Leave your optimism at the curb
- Budgeting must be driven by strategy
- Connect the dots
- A careless budget will cause more pain
- Don’t forget the smell test
Today, I expand on ideas 4 and 5, which deal more with the actual preparation of the budget; the practical challenges.
Connect the dots
Because we assemble budgets at the line item level, we risk believing the process is simply the aggregation of line item budget amounts. This fragmented approach will yield a fragmented result, with little value to you or the business.
Budgets are not forecasts or estimates of what could happen. The budget is your plan of what will happen. Accordingly, the budget process actually starts from the top. A quality budget will tell a complete and coherent story at the highest level – like a navigator’s map, reflecting your point of origin, your destination (goals), the terrain (environment), distance to travel (measure progress), direction, optional routes (when stuff happens) and landmarks (reference points).
Getting the big picture requires that you understand the correlation/interaction of its components – the line items. For example, if you are increasing your direct marketing budget, have you also considered?
- A possible corresponding reduction in display advertising
- Costs for crafting direct marketing campaigns (usually more work than display ads)
- Staffing costs for timely follow up on leads form direct marketing campaigns
- Costs incidental to the staffing increase (tax, benefit, training, etc)
- Effect of strategy on the fulfillment/sales/collection cycles
There are few items in your budget that truly stand alone. Make your budgeting process worth the effort you are putting into it by connecting all the dots to plot next year’s journey.
A careless budget will cause more pain
Understandably, the budgeting process can feel like a tedious, time consuming and futile effort. “Why set a budget? I can’t control what is going to happen to my business. We respond how we have to respond and spend what we have to spend anyway.”
This attitude will doom your efforts. The very purpose of budgeting is to gain control. As I noted, budgets are not just casual estimations of what might happen. A quality budget plants an iron rod of confidence and accountability into the spine of your business.
Sure, “stuff happens” to your business, but you control how it responds. Succumbing to the belief that budgeting is a pointless exercise will result in a careless effort to “just get it done.” The real pain will come the following year when stuff does happen and the maps (budget) you are using to navigate your business lack a Northern Star to guide you.
This was part 2 of the 2011 budgeting series on the Performance Ideas blog. More to follow soon.
About the author of this post:
Mike Duncan is Partner and co-founder of Bizzeness, LLC. Mike began his career with KPMG and Deloitte. He has been a business owner and advisor for over 30 years serving over 300 businesses in various capacities. Mike focuses on SMB’s with concept development, business modeling, start-up, market adaption, strategy and succession. Mike lives in the Kansas City area. You can contact Mike at email@example.com.
Mike has written a prior guest post on this blog.