Defining objectives
To become a genuine management tool, the budget must reflect the company's strategy, with objectives clearly defined by the manager.
It's a big mistake to draw up a budget simply by setting a target for overall sales growth. On the contrary, the company needs to precisely define its sales targets for each market, each business sector, and ideally each product line and customer segment. The better this division is made, the better the forecasted expenses can be evaluated.
- Draw up a timetable with precise deadlines
The key to success in preparing and finalizing your budget on time is to draw up a timetable setting out the deadline for validation. The timetable should set out the main stages of the budget phase, with the tasks of each player in the process, as well as the preparation times. For each stage, the document to be produced must be defined.
The schedule can be drawn up in a spreadsheet (Excel for example) or with project management software (MS Project is a commonly used tool).
The calendar will be the ‘roadmap’ for all participants in the budgeting process.
- Raising awareness
There's no point in setting a timetable if it isn't circulated and accepted by all those involved. To obtain the support and relevant contribution of all stakeholders, a kick-off meeting should be held in plenary session, bringing together all players: commercial, technical, administrative...
This is the ideal time to obtain feedback on the preparation of the previous year's budget, and to take stock of interim results.
- Set up a procedure laying down the rules
It is important to define rules that are known to all. In particular, budget preparation procedures must define deadlines, content, ratios and comments to be made.
The cornerstone of a good budget forecast is the ”framework note“. With it, the manager determines the main guidelines of the budget to be drawn up. This involves setting out the main objectives, in quantitative terms (sales growth, margin levels, changes in payroll costs), but also in qualitative terms (customer loyalty rates, product quality levels). Failure to do so could work against the company's interests. The sales manager, for example, could be tempted to achieve his sales targets at the expense of the quality of products delivered and after-sales service, while the head of a business unit could be tempted to achieve his net margin target by cutting out training for his staff, etc.
As soon as it has been finalized, the framework document must be sent to all company managers. It is then up to each manager to determine his or her own objectives, as well as the human and material resources required to achieve them. To remain realistic and coherent, this process must be based on consultation and a broad exchange of information. First and foremost between the CEO and each manager, of course. But also between managers: it would be absurd for the sales manager to determine his ”envelope” without discussing it with the production manager, and vice versa.
This method has another essential advantage: as each department manager draws up his or her own budget, he or she must legitimately commit to respecting it. A real budget forecast is a contract signed by all those involved in its construction.
- Involve business stakeholders: sales, technical managers, etc.
Budgeting is not just a matter for financiers. The different elements of a budget :
- sales volume ;
- sales margin ;
- investments ;
must be prepared by the people concerned. Responsible persons are to be appointed as RC - Responsibility Center managers.
Each department must draw up a budget, including support services such as personnel management and accounting, which many companies forget. In addition, tensions can arise between the heads of different departments, particularly over the allocation of material and human resources. It's up to management to manage and arbitrate these issues, while maintaining a certain degree of harmony.
Read the article on cash flow forecasts
- Setting realistic assumptions
To draw up a budget, you need to start from realistic assumptions:
- economic growth in the country; ;
- market growth in your sector
- changes in global indicators (exchange rates, oil prices, etc.);
- political developments in the country
These assumptions will enable you to add value to your forecasts and measure the consistency of your figures. Indeed, sales growth forecasts in a market in recession may seem unrealistic.
In this section, you'll need to take into account any changes in the sector or sectors of the economy that could have a significant impact on your business, such as the bankruptcy or difficulties of a major company, or a sector in crisis (national or international).
Economic data are published by the Statistics Directorate or by embassy economic missions. The World Bank also publishes economic and sectoral data.
- Seasonalization: what's it all about?
The best way to do this is to make a clean sweep of the past each year, and build your projected income statement from scratch. However, it is acceptable to start from the last budget and recent data (at the end of September, for example).
Ideally, the budget should be drawn up on a monthly basis, either on a linear basis (annual budget divided by 12 months) or by taking into account the seasonal effects of activities (‘seasonalized’ budget). Seasonalization must take into account the coefficients of variation observed in previous years.
This monthly reporting system enables regular monitoring, and enables us to draw management's attention to any slippage.
- Manage and monitor projects
Ideally, achievements should be tracked against the budget on a monthly basis, so that deviations can be detected in good time and corrective action taken.
The budget is now complete. Now it's time to make the most of it, to turn it into an effective management tool throughout the year.
How?
By regularly (e.g. monthly) comparing actual performance with budget, based on a few carefully chosen indicators. What's important is to know how to analyze the cause of any discrepancies, and above all to react quickly to counter any deviations.
These days, budget tracking software is a must if you want to avoid any surprises. The system must be able to detect, at the time of purchase, whether the purchase is likely to exceed the budget. It will then be up to you to decide whether or not to go over budget, and to continue the process.
If, however, actual results fall well short of forecasts, don't hesitate to use what experts call ”budget update”. In other words, draw up a new budget more in line with reality, which cancels and replaces the previous one. And review the objectives assigned to your teams. Otherwise, the budgeting process will lose all credibility in their eyes.
To conclude
‘Managing is forecasting’: setting objectives and translating them into financial terms is becoming a necessity for every company. The whole company must be mobilized to draw up the budget and monitor achievements. The company's survival depends on it. Having expert support at the outset and a management tool are no longer a ‘nice to have’ but a ‘must have’.
About Moore Senegal
We help finance departments to set up and manage budgets, and implement the Odoo budget control solution and dashboards for effective management of objectives.
