The Federal Government budget is out and for many professional firms that timing should herald the start of their own budgeting process. It is often perceived as a painful annual process and everyone is glad when it is all over. If it is any consolation Scott Morrison probably feels like that too.
Just as it is for government, budgeting is essential to any business and it often provides the only opportunity for the owners of the business sit down and think about their strategy, the direction they want their business to take and where to focus their time and energy (and more critically, where NOT to focus). And surely that is a good thing.
So where is the best place to start? When terms like “top down” and “bottom up” are thrown around at budget time it not surprising you want to give up before you start. So what is the best approach?
The truth is, the best approach is the one that:
- provides the most realistic and achievable goals for the coming year (so the budget is not thrown out before the Christmas decorations are up);
- will keep your business on strategy;
- aligns with and motivates your staff’s performance;
- ensures you have cash when you need it; and
- allows the owners to get the return on their investment they were expecting.
Budgeting is a science (and mostly excel formulas) but it is also an art.
Step 1 is to apply the science and the formulas in the spreadsheets. Most firms will calculate revenue based on capacity – a combination of staff numbers, available work days, utilisation rates, charge out rates and other variables. Salaries and on costs are generally under annual review at budget time and will be set. Direct and indirect expenses may need some consultation, analysis, uplift or reduction.
Step 2 is to add the secret ingredient – a dash of creativity. By creativity, I mean the business owners need to add their own “gut feel” from their business experience and knowledge of their industry or market to make sure the budget is realistic and achievable and remains in line with their strategic directions. It is also a good idea that the accountant has a good look to make sure it allows the business to keep running with sufficient cashflow and that the owners are able to take their rewards for investment and hard work. And if you align your budget to the performance goals of your staff your chances of success are multiplied.
So it is now time to put pen to paper, or should I say, spreadsheet. But don’t forget the secret ingredient.
Author – Belinda Marschke