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Better budgeting in 10 steps

By Lauren

Many entrepreneurs and their management teams don’t devote enough time or attention to the process of preparing annual budgets, especially when they operate in rapidly growing or uncertain markets. A financial plan in a private company is at risk of becoming gradually ignored over time, devaluing the operational benefits of measuring performance against budget and the process next time round. With a careful and efficient planning process a business will set a much clearer picture of where it is heading, knowing what to do at each stage to hit and exceed targets, but also how to react when these are missed.

With the benefit of our collective experience of managing hundreds of budgets and plans, we have put together some top tips on making your budgets more robust, realistic and valuable.

  1. Get everyone involved – It is a common place misconception that your finance team puts a budget together. A business plan and its budget should be produced by the collective planning and thinking of the whole management team. All members of a board or management group should feel equally responsible for and spend an equal amount of time on the planning process.
  2. Set the company’s goals – From the very beginning agree what the overall financial targets for the company should look like. Department heads will break these goals down building their budgets up from the current year-to-date base. This ‘ball-park’ planning speeds up the process and avoids unrealistic sales plans, empire building, or under-achieving forecasts.
  3. Build a flexible budget – There’s nothing more frustrating than having to re-build a budget for every scenario and sensitivity. By building a flexible model with a bank of adjustable detailed assumptions, you will build a far more robust budget capable of adapting for both conservative and ambitious levels of confidence. Flexible budget models allow you to adjust at speed for re-forecasts throughout the year.
  4. Presentation is key – Most people’s eyes blur up when they see more than ten figures on a page. Use lots of colour, different font sizes and formatting. Bring your budget alive with charts, diagrams and pictures which show trends, proportions, structures and comparisons to previous years and future forecasts.
  5. Use summaries with drill-down – Show key annual information on a summary spreadsheet and page: headline income, costs of sale, expenditures, headcount and capital expenditure, with comparisons. Behind the overview rests each successive level of detail down to the most granular budget assumption, such as training or travel allowances per head. These should be available for drill-down to satisfy any review and to help make rapid decisions during the year.
  6. Keep it simple – It is easier to understand a budget by using a system of layered spreadsheets linked to an array of assumptions, rather than long complicated formulae hidden in cells in one massive spreadsheet, which nobody can find and, when they do, they can’t understand.
  7. Build an integrated model that works – Spend time building a robust, integrated model at the outset linking your Profit & Loss, Cash Flow and Balance Sheet. This is essential to be able to stress-test your budget and cash flow. You will need to see the impact of each revenue, cost and investment assumption.
  8. Save time and learn useful Excel features – Use labour-saving formulae and features in Excel.  The following suggestions can be particularly useful to make your spread sheets easier to adapt and read.  For example; MIN and MAX for cash flows, IRR for internal rates of return, IF statements for variables, Pivot Tables for analysis, Names to describe the meaning of a formula, Views for different users, and LookUp for linked data.
  9. Version control – Keep a tight hold of each version with its assumptions which drive the headline figures for revenue, margin, overheads, profit, cash, headcount, capital expenditure and net assets. This will avoid confusion and steer a fast course to the optimal plan which everyone signs up to.
  10. Make your budget SMART (Specific Measureable Achievable Results-oriented and Time-scaled) – Your business and each of your departments should end up with a SMART budget with a clear map of the financial measures and gauges of what you intend to achieve as a business over the budget period, with staging posts marked out for key operating and investment decisions.

Please contact Chris Chapman on chris.chapman@lgbusinessadvisors.co.uk if you would like further information on how LGBA can help you. Chris is also Managing Partner of Numitas which offers the expertise of high calibre finance directors to growing companies on a part-time, flexible and affordable basis.

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