Setting budgets can be as easy as ABC

Every year, there comes a period in the life of managers that they either love or loathe - the time to prepare budgets! While those who enjoy numbers can't wait to sink their teeth into the financials, projections, break even analysis, risk modelling, etc, there are those who would rather procrastinate, delegate or have their teeth extracted without anaesthesia than work on the budgets. This blogs is for those who are petrified of budgets and want to know a better, less painful way of setting and managing budgets.

ABC of budgeting!

If you are a parent who has gone on a holiday with toddlers, who will easily relate to the parallels between planning and going on a holiday with a toddler and the process of setting budgets.  I don't want to undermine the importance of colleagues in financial and accounting professions, but the theory of budgeting can be quite simple. Infact, I would go so far as to say it's as simple as A B C. Below I will explain each one of these in detail but before that let me give you an example. I want you to think about the way you plan your holiday. The first step is to think about the destination. The destination is chosen based on what you have or have not done in the past, what you enjoyed or didn't enjoy in the past. Then, once the destination is chosen, all the basics are booked (again based on past preferences). All the new activities, sight seeing, excursions, etc are booked. Then lastly you think about customising the trip, taking precautions and getting travel insurance. This process followed is exactly what you do to budget. You look at the past, think about the future and take precautions. This is the ABC of budgeting.

A - Assess the past

The basic and simple principle to remember is that the past determines the future. The financial performance in the past, to quite an extent, helps determines the future budget and forms the foundation of the new budget. If you are a new manager setting a budget for the first time or an old manager responsible for setting a budget for a new department, the first point of call would be to look at the old budgets. When assessing the old budget, you are looking for what activities and expenses had incurred, what were the deviations, what were the challenges and what trends emerge. This analysis will give you a very healthy indication of what to anticipate when forecasting for the future. Assessing the past also will give you a realistic idea of the nature of the spend.

B - Bill for the future

The next thing to do to build your budget is to think about the future. This includes thinking about the internal and external factors that are likely to impact on carrying out the work in the future. Also think about what new initiatives and activities are likely to be implemented in the future and to build the costs of those in the budget. If there are major changes that are taking place or introduction of new policies, procedures or systems, the costs of those will also need to be factored in. Yes, there is a little bit of estimation and guess work that goes in the forecasting, but if you have analysed the past performance properly, there will be a clear indication and calculated guess can be taken.

C - Cater for cuts

The third and final step for the budgeting process is to cater for cuts. Each and every good budgeter or manager knows that what has been put in the forecast of the budget and the final budget that is handed back to the budgeters has a huge discrepancy. It is usual for there to be drastic changes and reductions in the finances proposed and the actuals that are granted. Therefore, a smart manager, caters for these cuts in the original forecasts itself. It's called buffering. This means building in a little extra into the original budget for each activity so that when there are cuts, there is a little room to manoeuvre and wriggle around in the budget to achieve the outcomes that you'd like.

This process gives a little contingency for the future and helps reduce the impact of cuts and provides a little fallback cushion for emergencies.

So, dear readers, that is my short blog on how budgeting can be as simple as ABC, all you have to do is change your attitude and perceptions of the process. Finally, although the theory is quite simple, to put it into practice does require attention to detail, accuracy, little financial acumen and a whole load of common sense. If you enjoyed reading this blog and want to challenge your thinking about other management issues, do read the other blogs in School of Mumagement.