Getting the most out of your budgeting process

Welcome to a two-part series in which I focus on the more technical side of 3K&L business offerings.  In my previous blogs, I have spoken about the softer side of the business and the ‘soft skills’ that an entrepreneur should display as they plan their business and proceed on their journey.  I was torn between writing on the technical elements of Corporate Governance, but decided to jump to risk management and in particular, the process of preparing a budget. In subsequent blogs, I will talk about how this is a core part of the risk management process.

Many times, when I speak to individuals, they seem to have varying, yet narrow perspectives of what a budget is. Some of the sentiments shared are:

  • A budget is something the finance guys make us do to ‘keep us in check’/ ‘get us into trouble’.
  • The budget is an aspiration of the numbers we want to achieve.
  • The budget is the basis for my bonus!

There are many more, but I believe the above deliver the gist of my message. Many people do not see budgets as a culmination of a deliberate and focused planning process. The same seems to also applies to our personal budgets.  We see personal budgets as a way of keeping ourselves in check and controlling our excesses. We want to make sure that we spend less than we earn and leave behind enough for savings and/ or investments.

Now, none of the above views are wrong. Budgets keep us in check and highlight those who are going against the plan.  Budgets tell us where we are going and are a means of motivation (especially when it comes to bonuses!).  But, if we re-think about how we see budget, we can use them as a more profound tool to guide your actions and track your progress.

Before I jump into the details, I need to lay a foundation.  As you go through this blog, I would like you to remember three underlying principles:

  1. Profit or cost centres – budgets are prepared around these
  2. SMART objectives
  3. Synergies and unity of purpose – budgets should achieve this, in a business or in your home.

I will try to redirect you to these principles throughout the piece.

As an entrepreneur and leader, before you start a budget, you need to ask yourself ‘What do I hope to achieve in the next 12-36 months?’.  Usually, the first answer that pops to mind is PROFIT or PAY INCREASE. I applaud that. It is the capitalist in all of us.  Though, to that, I always respond; ‘Profit is the sum total of all your actions and not an ends in itself’.

So you have to go back to your fundamental vision, mission and purpose.  For example, at 3K&L, our mission is ‘Providing the best professional advice to local entities that want to grow through sound corporate governance, risk management structures and financial management.’ As the driver of the business, I am then required to break this down into its elements.  You can find the elements on our website https://3kandl.com/about/. However, the first element in the mission statement are the words ‘best professional advice’.  This means I must invest in quality – quality people, quality information, and quality systems. At this part of the process, the two of three foundational principles, do not come into play.  Our mission is normally aspirational and entity-wide and is not time bound. However, it should serve to provide a ‘unity of purpose’ to all within the entity.

With the above in perspective, the first step is for the senior most people in the organisation to decide What are we trying to achieve over the next 12-36 months?  The time frame is merely a guide. You will need to decide what sort of period you are working with. For a crisis, the time frame might be 3-6 months. This duration might also be applicable for a personal budget.  A short time-frame should always work in the context of a longer term agenda… remember my advice in a earlier blog ‘Avoid short-term profit taking at the expense of the long-term’.

Back to the point at hand… Once this fundamental question has been answered, it is now the responsibility of the senior managers to break down what the organisation hopes to achieve into its specific components.  The tricky thing is, a mission is for the long run, a budget is often for a year.  As such, there has to be a balance between the short-term targets and the long-term strategy as you breakdown the strategy/ mission into its elements.  {keep in mind the three principles}.

Normally, 3-6 strategic components or areas are considered sufficient, as each area is going to be broken even further into its variable for the purpose of the budget and planning process.

Again here, senior management should be involved as the sum total of the parts, must make up the whole.  A bad planning process fails to identify critical components of the strategy. There is little substitute for experience in this process.  If you don’t have the experience in-house, look for it.  The last thing any business can afford is to have a ‘who-was-supposed-to-have-covered-that?’ moment. It can easily set you back a year or more in your journey.

Having laid everything out, I bet you have figured out the second element – breakdown your mission/ plan/ goals into key components.

Once you have components that you believe add up to the whole and these are less than 15 different items 🙂 , you can then move to the next phase – Determine the key variables that drive the components.  Remember, I highlighted that each component will be further broken down, that is what happens here.

Every strategic component is subject to variables. There is no limit to the number of variables, but the more variables you have, the more complicated your planning process will be. If you find yourself with too many variables, then it is probably time to return to your components and make them more specific. Variables are also not pre-defined.  Yes, certain sectors might share variables – for example, pre-paid and post paid customers in telecommunications. But others might be more interested in data vs voice customers in the same sector.  Avoid following the crowd on this one.

Going back to my example of giving the best advice, the variables in there might be – right reference material, appropriate identification and development for staff, having a relevant review mechanism.

The last step in this part of the series, is heavily intertwined with identifying the variables – Check how much data do you have about each variable.  In the above example from a telecoms perspective, the number of customers, location, average spend, etc., would all be useful data.  In my case, data around globally accepted levels of quality would be pertinent.  When collecting data and assessing it, keep in mind some elements of good data. For example, it must be relevant. Secondly, do not inundate people with too much data.  Budgets are not a number crunching exercise, but a decision-making process (though many times, you need to crunch the numbers to make the decision).  Lastly, data should be both quantitative and qualitative and should come from internal and external sources.  A restaurant that relies on internal data about the quality of their food and service, is likely to encounter some problems….

Let me stop there for now. I will be putting the last three steps in the budgeting process in the coming days.  I hope you will be here to read and give me your feedback.

All in all, these blogs are like ‘Dr Google’.  They are a good source of information and knowledge, but they are not a substitute for seeing a ‘doctor’.  3K&L is here to ensure that you get the right foundation and the right support to grow your business.  Give us a call or drop us an email. We are here to help!

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