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1) Evaluate current position and estabilish the future goal position (vision, mission statements), make sure strategic plan aligns with achieving this.
2) Identify key metrics to measure the success
3) Evaluate and manage risks
4) Ensure the top management of the organization are100% supportive of the strategic plan
5) Have a Change Management strategy to ensure the people part of the organization are ready
Consideration #1: What is your starting point? Often people use last year’s budget as a starting point and apply percentages for growth and inflation. In today’s market scenario, that is not a very wise thing to do. Check your run-off rate (orders in the bag or backlog) situation first and then the funnel. Determine the return on investment that you have made in previous year on new products and services that are likely to bear fruit to arrive at the stretch that is possible. Validate your assumptions against the market growth in your segment as well as the trends in the previous year to finally close on the plan for the next year.
Consideration #2: Do you know what your short-term (year ahead) AND long-term (3-5 years) goals are? While short-term goals for the year are usually determined by your management (could be you) or your investors based on the size of your company and you may not have much say in that, there has to be a built-in plan in your budget for the year(s) after that. What do you need to invest in now in order to ensure that your growth in the long-term is secured? This will have an impact on the margins target for the current year and hence an important consideration on where you want to allocate your available money in this year’s budget.
Consideration #3: Is your team ready and enthused? This by itself is the single most important factor that could make or break your budget in my view. Has the budget creation process been a participatory one with the key members of your team involved, engaged and aligned to the goals in the budget? Are they enabled enough to drive the growth or manage the costs as needed? Are they willing to collaborate and support each other to make the year a success? It all boils down to the culture that is prevalent in the organization – no budget can be met if your team is not ready.
Consideration #4: What is your Plan B? There has to be enough provisions in your budget to allow for changes midway if things don’t turn out as expected (Murphy’s law again – what can go wrong will go wrong). Also the budget should be created in such a way that it remains a “living” budget – to be able to move around a few allocations for investments areas and growth areas based on performance trends during the year without affecting the target business metrics.
Consideration #5: Are your systems and processes ready? Break down the budget into tasks with timelines, identifying the stakeholders best suited for each task, aligning existing processes and designing new processes and metrics to ensure sustainability IN ADVANCE. Assign accountability within the organization not just at the senior levels but right up to the front-line staff to ensure everyone knows and is signed up for the budget. This helps in providing a clear line of sight for achieving the budget while building confidence in the budget within the organization itself. Review your systems (including approval mechanisms and dashboards) to ensure that you have every tool you need to monitor the progress on your budget.
If we can incorporate the thinking above along with rigorous financial planning and analysis, I am confident that the budget would become an enabler to meeting the performance objectives rather than an obstacle as it is commonly perceived.
“Before you start some work, always ask yourself three questions – Why am I doing it, what the results might be and will I be successful. Only when you think deeply and find satisfactory answers to these questions, go ahead.” Chanakya (circa370-283 BC)
What factors do you consider when preparing your budgets? What tool or process do you think most helps in successful implementation of a budget? I would love to hear and learn from you.
