Are you watching your figures?

Nothing in business is more important than money. Businesses exist to create value, expressed as revenue and share price. So, if you've been put in charge of this vital component in the operation, it is testimony to the trust you have earned, says financial journalist John Hancock

By John Hancock

Budgeting is logical; it needs an eye for detail and requires regular attention to succeed. The purpose of the budget is not to generate profit, but to plan cashflow and create a structure within which cashflow can be managed throughout the year. It's about timing so that, wherever possible, expenses can follow revenue generation and, where that is not possible, the cost can be understood in advance and allowed for. It is also about managing how costs are incurred, not simply to minimise them, but to avoid waste and promote the best use of resources.

Let's look at how the person handling budgets in a small/medium enterprise can best tackle the job. Most organisations establish objectives for the plan year, agree strategies to meet those objectives and draft specific plans to implement those strategies. The costs of carrying through those plans plus the running costs of the organisation, are the basis for the budget. It is not sufficient to simply take last year’s costs and add a percentage to them.

Getting started
The first step should be to identify which costs are fixed and which are variable. Fixed costs are those such as premises or equipment rental and business rates which cannot be altered within the current set up of the business. Variable costs are the ones generated by productive activity such as telephones and vehicle running costs and where increases should be matched by increased outputs. Don't be tempted to establish a contingency budget, as they are prone to be used as cover for over-spending. Any over-spend against the budget should be subject to the same scrutiny as the rest of the expenses of the business. That does not mean they will not be agreed, but it does mean that they will need to be explained.

When creating a budget, use a spreadsheet such as Microsoft’s Excel and nominate a workbook for the whole exercise, allocating each department in the budget a series of identical worksheets. It's also a good idea to ask all of those who submit departmental or divisional budgets to go through them and explain what each item actually refers to. That way, the budget controller will be more likely to spot duplications that may not be obvious at first sight – one department’s mailing software may well be the same as another department’s customer database manager – where co-ordinated buying could save costs. Also, it is a good idea to only allow departments to budget for those things over which they have control, with most company-wide costs being pre-allocated into their budget in agreed proportions. In other words, departments will take a share of the rent costs according to the space they occupy.

In the spreadsheets, columns represent months of the year while rows represent items of expenditure. A further sophistication can be to summarise each quarter and, when the budgets have been agreed, a further set of columns should be introduced to record actual performance alongside each budget column. A single summary sheet for the whole business should then be created.

This type of presentation makes it possible to identify where over-runs have arisen (by department and/or type of expenditure) and, in turn, discover the reasons. It also allows under-spending to be identified and, again, the reasons discovered and any useful lessons applied more broadly in the business. Expenses are best monitored in real time, ie the payment system automatically transfers data to the budget control spreadsheet. If, however, that is impractical, manual transfers must be kept up to date so that the budget controller is alerted to any trends sooner rather than later. A record of bills payable will also help to foresee any problems. Simply knowing that an expense will quickly appear on the budget control sheet will make most expense initiators think before they act.

Exercise your control
Controlling the budget addresses two levels - the big picture, and the individual expenditure by expense and month. Control relies on an understanding of what the organisation does and how it works, plus an ability to earn the trust of people. That way, any anticipated over-spend or need to bring an expense forward will be notified to the person running the budget in advance to allow adjustments to be made in a planned manner rather than as a reaction after the event.

The advantage of one person overseeing all budgets is that they are more likely to identify organisation-wide opportunities to save costs. For instance, if the office buys printing paper from one source while the dispatch department buys wrapping paper from another source, there may be advantage in combining both buying policies to achieve bulk discounts from one paper supplier. Also, one person concerned with expenses will be able to obtain competitive quotes on supplies which should be done each year to avoid the "we’ve always used this supplier" syndrome. Of course, the budget controller’s communication skills come in handy again, here, in order to ensure that all requirements for supplies are included in any quote.

The person controlling the budget can always be on the look-out for cost savings, such as cheaper telephony deals. Look into resources such as DeskDemon for ideas on how to do things better. And apart from asking the question, "can it be done for less cost", the budget controller needs to ask also, "does it need to be done at all?" because, as work changes, some tasks do become unnecessary.

Last, but by no means least, either chase payments or, if that is not practical, consider factoring or invoice financing. This way, the business will have the use of most of the value of invoices sent out right away and that will aid cashflow, which, in turn, will cut costs and boost profitability.

Budget control will be more likely to succeed if it is based on agreement at the outset, and a shared understanding of the budget by all of those concerned. With agreement comes ownership of each individual’s part of the budget and, with that, comes a readiness to self-regulate expenditure. That way it will be much easier to know where the money goes.

John Hancock is a successful freelance journalist specialising in business, finance & investment, technology applications and travel subjects. He also writes and edits business and investment books as well as creating corporate profiles and histories.

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