“A budget is telling you where your money must go instead of you wondering where it has gone.”
Budgeting always has added value for your organisation. Both in uncertain times such as those we live in at the moment and in more stable times.
By drawing up a budget, you as an organisation get a clearer picture and insight into your expenditure and revenue patterns.
A budget is not a guarantee of success, but it does offer you a grip.
Strategic translation of priorities
An important step in the budgeting process is to determine your priorities.
Which strategic objectives are most important to your organisation and which actions are needed in order to achieve them?
- Growth
- Cost savings
- Investments in new services / products
- Etc.
By setting priorities, you ensure that your budget is spent on the things that contribute most to realising your goals. It is best to translate these strategic objectives into specific actions and projects. In this way, you make possible a good and concrete follow-up of your budget.
Monitoring your budget is important in all circumstances. If your strategy and objectives change then the budget must be adjusted accordingly to ensure that your organisation remains on course to realise these objectives. Thus, a budget is not a fixed given, but rather something that moves dynamically with your organisation.
By integrating KPIs into your budget, you can also monitor the objectives.
Determining KPIs is best done in a SMART manner:
S specific - clearly defined
M measurable - can be expressed in numbers or percentages
A acceptable - in consultation with those involved
R realistic - relevant for the goal and directly related to the objective
T time-bound - deadline for realising the objective
Understanding of structure
A good understanding of your current cost and revenue structure is also important.
- How have certain sectors evolved in recent years?
- Bear in mind that not every sector is equally sensitive to external factors
- What is the impact of recent wage indexations on our organisation?
- Can a certain periodicity be observed?
Dashboarding via BI helps you to visualise and fathom the insights in the structure in preparation for an accurately constructed budget.
Also read this article on the importance of dashboarding: Dashboarding in times of uncertainty - BDO
Scenario Analyses when formulating a budget
When preparing your budget, it is also appropriate to build assumptions or scenarios into the realisation of your objectives (e.g. best case vs worst case). What is the impact and what does this mean for the financial health of your organisation?
In the uncertain times in which we now live, a comparative analysis is a must.
Focus not only on cost savings
A common error in budgeting is the cost-cutting of your expenditure. Cost savings are important, but they are not the only way to keep your organisation healthy. Optimisation of business processes and the analysis of revenue flows are equally as important in coming to a well-substantiated budget.
Which budgeting technique can we best apply?
There is no specific budgeting technique that is the most suitable for all organisations. The choice of the most appropriate budgeting technique depends on several factors, such as:
- the nature of the activities
- the size
- the resources available
- the objectives
Some commonly used budgeting techniques are:
Incremental budgeting: this technique involves basing the budget on the previous year's expenditure, with a growth rate on top. (looking back – looking forward principle). This can often be considered as a grip when “policy” remains the same. This technique is more likely to be useful in particular times that are less sensitive to cyclical trends.
Zero-based budgeting: this technique requires building the budget from scratch. Each part of the budget is looked at individually and changes in market conditions can be quickly responded to.
Activity-based budgeting: this technique focuses on identifying the most important activities of a company and the costs associated with them.
You choose a particular budgeting technique on the basis of the specific needs and circumstances of your organisation.
It is important to consider the different options and choose the technique that best suits your objectives.
Want to know which budgeting technique and application is most suitable for your organisation?
If so, please contact the BDO Smart Business Solutions Team: SmartBusinessSolutions@bdo.be