Budgeting is probably the least-loved business management tool. Even the word “budget” brings to mind disapproving accountants and denied requests. And how often have we heard the phrase, “it’s not in the budget”? Nevertheless, budgeting is one of the most valuable tools in your management arsenal.
What do I get out of budgeting?
Let’s look at what budgeting can do for your business: Budgeting puts the money where strategy’s mouth is. I call it strategic alignment. Spend money on strategic priorities.
It sounds obvious, but during more than 30 years’ working with businesses of all sizes that are trying to grow, I’ve seen them do just the opposite: They talk about priorities when they get together, but spend on other things entirely. For example, I worked with a company that intended to emphasise customer service but spent nothing on employee training, more employees or better-quality items to sell.
Budgeting means taking the wheel
The next question is: How will I know whether I’m actually addressing priorities in my day-to-day operations? You think it’s obvious, but I’ve been there: The phone starts ringing, fires need to be put out, days and weeks and months go by. With the budgeting process, however, you can turn to the numbers and see how your spending breaks down into categories. Compare that to your original budget. Now you have a tool to track your progress and, of course (here’s where the management comes in), make corrections.
Budgeting is precaution, safety and risk-proofing during a storm
If the economic news spells a recession, we all run to our budgets to prepare for the storm. If sales go down, we need to recognise it quickly and identify possible course corrections. Usually that means watching expenses. That’s all budgeting. Budgeting is about process, not just numbers.
So that’s how I look at budgeting: It’s a process, not just a budget. What’s really important about budgeting – and where you get the real benefit for your business – is in completing the full process. That means you develop a good budget for the beginning of the year and then carefully manage changes – budget plan vs actual budget – throughout the year.
Here are nine tips to help you develop a good budget:
- Your budget will be wrong; all budgets are.
Budgeting means guessing the future – and it doesn’t have to be an accurate guess to be vital to management. If you don’t have a budget – even if it’s off – you can’t work with it to correct your course.
- The review process is absolutely critical.
It isn’t the budget itself that makes the budgeting worthwhile. It’s the review that comes regularly, focusing on what’s different from the budget. That means comparing budgeted expenses to actual expenses.
- The most important single point is the review schedule.
Never finish a budget without setting a schedule for budget review. That means when, where and who will attend the meeting. As my company grew from just me to 40 employees, we set up a regular budget review on the third Thursday of every month, giving us enough time to close the month. It doesn’t take long. We bring in lunch and we’re done by 2:30 p.m. Budget review is a powerful management tool. Bringing your people together to work on the budget builds an automatic peer process, pride in the performers and incentive for those who can do better.
- Keep the assumptions visible.
The first agenda item in the review meeting is to look at the assumptions. What’s changed? How does that affect our budget? We live in constant change, so good budgeting keeps the change where we can see it and manage it. Sticking to a budget isn’t necessarily the best course. Managing a budget, by seeing how assumptions have changed and correcting the course, is better.
- Keep it simple.
Try to build the budget so the information that comes out matches the people responsible as much as possible. Keep it summarised so you can see it well. If you divide the information into lots of detailed categories, all you see is the trees, and management requires seeing the forest. Build it so you can summarise and aggregate.
- Tools, tools, tools.
You may be like me, in that one of my weaknesses is that I get lost in the tools – the accounting software, for example, or the management database – when what really matters is the human process, the discipline to do things right.
- Match your accounting reports to key management items.
It’s called chart of accounts, and what it means is setting up categories that match control and responsibility, and the information you can manage later on. Accounting is going to be very detailed, but budgeting and budget management need summaries of categories and more aggregation.
- Set up your budget so you can see strategic priorities.
For example, in my company we needed to view sales by product and by channel, so we built the chart of accounts to categorise sales by product and channel. I worked with a coffee shop that needed to see sales broken into general categories such as drinks, food items and accessories. If that’s what you need to manage, then set up your bookkeeping to show it.
- As another example, break expenses into areas of control, like who’s responsible, rather than type of expense.
We have travel broken into upper management travel, sales travel, marketing travel and product development travel, because we want visibility for the specific people in charge of sales, marketing and product development. And that’s a company with 40 people, not 4 000.
- Set up your budget so you can see strategic priorities.
- Consistency matters, regardless of tools.
Do as I say, not as I’ve done. Some years we keep switching categories in the budget, trying to get better visibility. Those years we typically have less information because we can’t go back to the past. When we stick to our categories over time, it’s easier to see trends.
- Do the above.
You’ll be glad you did. Good budgeting brings your words and your numbers together. This is what you need to control and steer your company toward the future you want. The alternative is haphazardly reacting to events – essentially drifting. Good budgeting lets you control your destiny. Make no mistake: Budgeting is one of the keys to management.
Planning A Year End Function On A Budget? Five Fabulous Tips To Get The Most Bang For Your Buck
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
When you’re desperate for your event to be spectacular, but only have a shoestring budget to work with, then don’t despair, and by all means don’t settle for second best – it might be time to think out of the box this festive season.
When it comes to putting on First Class events, even if our clients’ budgets lean slightly more towards Steerage, we have had our experience and expertise tested many times over, and have never failed to deliver memorable and delightful events using these techniques.
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
1. Location, Location, Location
Unless you have your own venue, sourcing one may be one of your biggest items on your event budget. This should be looked at early into the planning process. It’s imperative to book a venue in advance to avoid last minute booking fees.
When it comes to finding a venue, don’t be afraid to approach things differently. There are often clever ways of using a fancy venue that may be less expensive. For instance, instead of using a venue’s master ballroom, enquire about their balcony, courtyard, or rooftop. You still get the advantage of a spectacular setting, but at a vastly reduced cost.
Consider also that mornings are often cheaper, especially if the venue can be turned around and used for another function later. Mondays are often quiet too and thus leaves room for negotiation.
2. Fun Food and Beverage
Believe it or not, your eats and drinks are not actually the hero of the event. When allocating budget and suppliers for catering, choose options that are satisfying without feeling pressured to produce over-the-top cuisine. More than that, overly-fancy or daring food could actually make people feel uneasy, and might have the opposite effect of what you want to achieve for the event – which is, people enjoying themselves!
With a small budget you have an opportunity to think creatively and venture away from the conventional approaches while remaining cost-effective. Try fun options like food trucks or mobile kitchens, if the venue allows external vendors.
Catering can be simple, yet still a crowd-pleaser.
3. Be flexible, stay open-minded
Successful event planning on a budget is all about seeing potential. You might come across free or cheaper items which may not be the exact things you wanted, but they still do the job. It might even spark another idea for decor or an activity that can work around these budget items better.
Recycle items instead of purchasing new items for every event. Reuse these items at multiple events . You can save by choosing to have items designed in such a way that they can be reused, by only changing certain parts or nothing at all.
4. Don’t be too proud to ask for sponsorships
Consider turning to sponsors to cover expensive items that are critical to the event. You might approach an existing supplier or technical partner to your business to cover costs in exchange for some tasteful brand exposure at your event, or a mention from the podium during speeches. Ensure that you have the data and audience information to make your pitch enticing.
5. Keep track…of everything
Finally, it’s important to keep track of all expenses, including the bitty ones, as they do add up quickly. The tighter the budget, the tighter you ought to be on your spending and make sure each one of the expenses is accounted for. Make sure that you’re fully aware of any hidden fees, such as set up, delivery and break down costs, prior to signing the contracts with your venue and vendors. Unforeseen costs only tend to pop up in the final invoicing stages, with a surprising figure. Check contracts, double check proposals and counter-check with final bills.
Here’s to a fabulous Year End Function!
5 Ways To Make An Impact On A Shoestring Budget
There are several ways to get involved with NPOs that do not necessarily involve funding.
If you are an entrepreneur or small business owner that wants to give back to the community, but aren’t sure that you have the funds to make a real impact? There are several ways to get involved with NPOs that do not necessarily involve funding.
1. Donate your time
If you are a busy entrepreneur, you might be tempted to simply donate money to a charity, but making an impact is about more than just the money. Your time and commitment to a cause that you are passionate about can make a real difference. Ask what an NPO can achieve with the time and skills you are able to donate, and partner with them to reach their goals in a sustainable manner.
2. Involve your employees
Your staff and your company’s time and expertise can be extremely valuable in building capacity, by sharing knowledge and skills with NPOs. Volunteering can make your employees feel good about themselves and proud to be part of your business, improving morale. It can even help you to retain or attract staff. Millennials, especially, want to work for companies that are part of something meaningful.
3. Focus your efforts
Try focusing on one or two causes where your resources and energies make a real impact, rather than attempting to be part of solutions for too many causes. You will end up making very little difference if your efforts are spread too thin. Take the time to determine what social or development issues are close to your company’s DNA, purpose and vision.
By making sure the cause is a good fit with your company’s brand and core objectives you ensure that whatever you can offer an NPO will make an impact on their operation.
4. Be committed
Effective social engagement is about long-term relationships and commitment. It takes time and sustained effort to make a real difference to the organisations with which you partner. Take the time to understand their core purpose, capacity, resources as well as the needs of that organisation in order to make a meaningful contribution.
5. Donations of goods or products
Does your company offer a service or produce goods that might be useful to an NPO? Offering services or products that NPOs most often do not have the budget for can equip and empower them to do their work more effectively for greater impact.
A Strategic Approach To Enterprise Cost Reduction
During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Companies in South Africa face a number of challenges that include slow Gross Domestic Product (GDP) growth, high unemployment and uncertainty associated with the current political environment. The tsunami of change driven by digital disruption as a result of the fourth industrial revolution has spread across the continent, potentially reshaping the competitive landscape in all regions. To tackle these complex and varied challenges, many South African companies may need to pursue cost reduction more aggressively.
Overall findings in Deloitte’s Strategic Cost Reduction Survey launched earlier this year found that South African companies cited “macro-economic concerns and recession” as a top external risk much more frequently than the European Union (EU) average (59% versus 34%).
Compared to European companies, South African companies posted worse historical results with over 40% of respondents stating that revenue has either remained the same or decreased over the past 24 months.
The survey found that the dual margin approach has been the norm for South African companies with cost reduction targets set very high and even higher cost program failure rates. One question to ponder is whether executives in the South Africa have subconsciously accepted the barriers and scaled back their cost reduction actions accordingly – even if a more aggressive approach to cost management could help their businesses thrive? During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Re-examining the strategy
Before designing a cost reduction programme, make sure your overall business strategy is still relevant within the current environment. Organisations transform their business for different reasons. Some are positioning themselves for new growth opportunities while others are restructuring to improve efficiency and reduce costs. What they have in common is the desire to dramatically improve their business performance.
Cost reduction programmes are commonly carried out in silos, without much more coordination than each having some portion of an overall rand target to meet. The task then becomes so complicated and fraught with sensitivities that little happens in the way of sustainable efficiencies. But it needn’t be so. If you go to the trouble of mobilising for cost reduction, you might as well make it stick, and create some competitive advantage along the way.
Traditionally, a company bases its strategy on its best prediction of what events could affect its business, and when. But in a fast-changing business environment, you need an approach that doesn’t require you to pretend to have a clear picture of the future. One way to do this is to define a range of scenarios of what the future may hold. Then, develop the best strategy to respond to each scenario. Initiatives that make sense only for certain scenarios become your “contingent strategies.” Once you formulate the core and contingent strategies, your cost reduction program will have to be just as flexible.
Establishing a cost base
A cost reduction programme is only as good as the data it’s based on. You need detailed cost data to identify which factors are driving business costs, as well as to justify cost reductions. The next step, therefore, is to figure your current cost baseline. The cost baseline indicates the costs you would incur if you took on no new cost reduction initiatives and with a cost baseline, you can measure the effect of your cost reduction programme by comparing actual costs to the expenses that would have occurred without it.
Start by updating the current year’s budget to reflect any new efforts, such as staff changes or the introduction of new products. This is a good time to cancel anything that cannot be resourced or no longer supports your strategy. Next step is to analyse your costs and headcount by business line, function, and location. Clearly state any rules for allocating centralised functions or shared services to individual lines of business.
While you’re doing this, try to figure out how your business came to have the cost structure it does. It probably is a product of many leadership regimes and acquisitions. Understanding the history can help you identify promising areas for cost reduction. Assess how each areas performance compares to that of best-practice organisations. If there’s a gap, determine how much you’d need to improve in order to close it. At the end of this project, you should have a decent sized list of potential cost reduction initiatives.
Set Cost Reduction Targets
One way to establish cost reduction targets is to try looking at them from several perspectives, such as:
- Contribution to Strategy – How the initiative will affect your strategic goals and impact on business Continuity.
- Investor View – This is how much cost cutting you need to do to support your current share price, assuming revenues stay flat. If you look at cost reduction from all three perspectives, you can triangulate them to set a cost reduction target that’s both achievable and acceptable to investors. Competitive View – Tally how much you need to save in order to become as efficient as the top performers in your industry. Knowing what your peers have achieved can give you an idea of what you can achieve.
- Operational View – Looking at each line of business to identify potential cost savings, and then aggregate them across the company.
- Ease of Implementation – Identifying whether there are any technical or cultural obstacles to implementation and how you deal with them?
- Risk – In terms of how significant are any implementation risks?
Companies that are able and willing to make bold cost moves could find that the current economic environment is a prime opportunity to position themselves for long-term success. Tactical cost actions alone will likely not be able to deliver the required level of cost savings. Companies need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralisation, reconfiguring the business, and outsourcing/offshoring business processes.