Budgeting for real life is a never ending challenge: most likely you’ll be wrong, the only uncertainty is by how much. But, as I’ve talked about before, it is an exercise worth persevering with.
An effective budget is a vital tool for building a successful business. Putting one together is no small task however it shouldn’t be viewed as a once a year job. In real life new opportunities or challenges rarely come along with perfect timing so that you get notice just before you create your budget.
Would you turn down a golden opportunity just because there was no spend allocated to it in your budget? That’s like saying would you pass up a sale because you’ve already hit your target?!
To manage a business effectively you need to stay flexible and reflect what’s going on in real life. If your budget is a work in progress then it can be an useful tool to refer to when you’ve got decisions to make. You can answer the “what if” questions and see how a single choice fits in to the bigger picture.
Numbers are good that way – word descriptions are subjective, but numbers (obviously chosen with care and consideration) give a more objective interpretation of the likely effects of a decision.
So how do you make this happen?
First, the key report you need is one that marries actual financial performance so far with the budget for the rest of the year. Then you need to keep updating it with both new actual results and amended forecasts that reflect your ever improving understanding of what the future holds.
Then, when a new opportunity crops up, there are two questions to ask:
1. How good is this opportunity?
Does it advance the business towards its strategic goals? Does it deliver profit and/ or additional cash? Does it deliver other non financial goals (reducing carbon emissions, improving resilience, etc)?
2. Do we have the necessary capacity?
This is both in terms of the financial capacity to invest in a new venture and capacity within the organisation to manage the workload that it will entail.
Available capacity changes as it is continually influenced by current performance so having a reliable, up to date picture of how the business is performing as the year goes along is crucial.
Maybe this sounds like a lot of work, but it’s what management accountants love! If you want to review how well financial planning works in your business then get in touch.