Steven Mugglestone

The more I learn, the less I know

To Budget or Not to Budget, That is The Question

with 2 comments

To Budget or Not to Budget, That is The Question

I have just read a number of articles and discussions in an Accountants discussion group about why a business/organisation budgets and whether it is necessary at all.  The discussion was heated at times (for Accountants), and it was interesting to read both accountants and non-accountants views (particularly those who view Accountants as unproductive evil bean counters whose sole purpose in an organisation is to suck the joy out of life).  I do not usually read Accountants discussion groups, as I usually acknowledge that Accountants are unproductive evil bean counters whose sole purpose in an organisation is to suck the joy out of life, but the discussion did touch upon a number of really key issues.

To a Finance Director or a Strategic Director the answer is simple; in fact the answer is why are you asking.

Business improvement and success is down to people, people, people

The success of any business does not (usually) just happen, in a Field of Dreams kind of way (i.e. if I build it, they will come).  Success, improvement and continued success of all businesses and organisations are down to a number of key factors:

  • People, people and people (and probably people)
  • Leadership, management and delivery (people, people and people again)
  • Marketing, networking and sales (what people are you selling to, how do you find them, and what do they want)
  • Systems and processes (tools being developed by people to help people)
  • The products or services (for other people by your people)
  • A plan to bring it all together (created by people for people)

We could digress down a route of leadership, management, journeys, buses, architects and builders etc., but the purpose of the blog is to concentrate on budgets.  We have already started our advice on successful change management, http://wp.me/pQyUg-28, and budgets and budgeting plays an important part in the changes for the better.

Given that people are the key, how can budgets really help to add value and drive a business?  Whilst business is about people, people are only, well human people, and we need help, structured help and systems.  Hopefully we can highlight some of those areas below.

Understanding and the starting point

All businesses are aiming to achieve something as, I would hope, are all people.  Leadership training and MBA theory would compare this to a journey.  Defining where we want to be may be one thing, but to get there we need a route map and a set of instructions of how to get there.  Any instructions for a journey, however, need to define where we are now.  Most organisations understand this and reflect on self-evaluation before they start on their development plans.

A budget can be seen as a starting point to actually understanding how a business operates financially, in the appropriate detail.  It is still quite incredible the number of businesses which only rely on an annual set of accounts to reflect on the business performance.  These accounts are usually prepared by their accountant up to nine months after the year end and provide little in the way of real support and direction for a business.  I read today that the key to success is to channel 80% of our time in effort in developing the opportunities of the future, rather than dealing with the mistakes of the past, and pretty much a large number of businesses are doing the opposite.

Many owner managed business people often claim that they completely understand their business, the gross margins, the product mix, the cost of production, the cost of developing, etc., etc., but actually when they look at the accounts, nine months later, they tend to find that they were wrong and we are now a year behind to address it.

Many people have said that accountants know the cost of everything and the value of nothing, but having a robust budget that allows an understanding of what is business is doing at the moment is the key starting point to being able to develop the business, improve the business and achieve its ultimate goals.

Spotting the improvements

At the early stages of using budgets, often a common quick win is to identify where improvements in profits can be obtained.  If budgeting is new to an organisation, it is likely that that organisation has been doing things pretty much in the same way for a considerable time.  Back to another saying, if you carry on doing the same thing the same way, you are likely to get what you have got.

The process of developing a budget to fully understand the operation of a business will produce the ideas and solutions to obtain improvements.  If it does not and your accountant does not help with this, it is more than likely that your accountant has never been a Finance Director within a business and has never had to tackle profit improvement.  Try talking to a Finance Director or an accountant who has been a Finance Director and I am sure you will be surprised at the improvements that can be found very quickly.

Executing the plan

OK, so we now understanding where we are and we have set a plan to reach our business aims (that bit, together with business turnaround and further change management, we will look to develop in other blogs, but we are sticking to budgets).

The budgets for each area, department, product, improvement etc., can know be used for control and evaluation.  A strategic plan will consist of a series of stepping stones and milestones of achievements, both operationally and financially.  Budgets can be used as a financial route plan to both control and evaluate, to ensure that the business is on course.  As with any journey, we need to understand that if we are going off course, we have the process and system in place to be able to identify this as quickly as possible, to be able to rectify this and head back on course.  As an analogy, if I am planning a trip to Edinburgh, I would hope that I realised that I was off-course before I reached Cairo.

Back to People

Budgets are just numbers really and I have already said that the key to the success of a business is people and good people change management http://wp.me/pQyUg-28. Again, budgets can play a vital role in this as a toll for communication and motivation.

All good and successful businesses provide regular and relevant channels of communication to their team; it is the key to all great organisations and their success.  A budget can be used to communicate to the team how the business is doing.  It breaks down what is required of an individual or their department into easy to understand pieces.  How much can I spend on this area this month, how many sales do I need to achieve today, how much money needs to be collected today etc., etc?  Many organisations give their staff little or no information about performance and the owner/directors then wonder why their management ends in frustration from both sides.  Leaders need to be able to not only provide vision, they need to ensure that their team are fully prepared for the delivery of the plan and that includes tools, training and understanding.  In providing a plan, they also need to allow that information is used to be able to provide small simple to understand stepping stones for all of the team.

Back to another analogy, how do you eat an elephant, ……?  The answer is one bite at a time.

Not only do budgets provide a channel of communication, they serve as a vital tool for motivation.  Everyone likes to be part of success, and to be recognised for their part in success.  (If not you have the wrong team, another analogy for the journey, right people on the bus and wrong people off the bus).  Achieving and beating budgets should be recognised.  This does not have to be totally financial (although that helps), saying thank you, a round of drinks or a box of chocolates can really help when dealing with bite size budget achievements and milestones.

Whilst we could go on and on, the purpose of the blog is to briefly highlight why budgets are important and provide a business with a vital tool.  Some people may say that budgets are there only to control and get in the way.  We really think that budgets can provide a business with a real opportunity to achieve their aims and fulfil their goals by:

  • To provide an opportunity to fully understand the operations of the business
  • To provide an opportunity to achieve initial and immediate profit improvement
  • To provide a route plan, stepping stones and milestones together with support for the strategic direction and strategic plan of the business
  • To ensure that the business is adequately controlled and evaluated (and this is done timely)
  • To provide key communication to your team and this is a key area for successful change management
  • To provide a key tool for motivation for your team and in doing so continue your plans for continued success

We aim to provide real support and advice to our current and future clients.  We see everyone as either our clients or our future clients.  We utilise our real and practical experiences as specialist advisers and Finance Directors to do this and because of our unique backgrounds, we know that we can make a difference and provide real success to our clients.

Steven Mugglestone BA FCA

We like to keep things simple, for ourselves and our clients;
We build our business by reducing our clients’ business and taxation costs;
We build our business by increasing our clients sales;
We build our business by helping our clients succeed in their business;
It is that simple and we meet you to discuss all these things for free;

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steven@mcgregorsbirmingham.co.uk

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Written by Steven Mugglestone

November 28, 2010 at 4:13 pm

2 Responses

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  1. Steven, I agree that the usefulness of budgets lies in their relevance. However, a budget is out of date the day it is agreed.
    I believe the language of budgets has moved on. Using budgets to help navigate your business is like driving your car using the rear view mirror. What is needed in today’s ever changing environment is a tool that enables managers to engage with the future.
    The past has happened, and there is only some, and only a little, value in spending time analysing it. What is more important is spending most of your time considering what you are going to do differently, and why, and then incorporating these changes into a revised “budget”.
    By navigating through the windscreen, constantly weighing up your options and changing scenery before you get there provides a far more robust business plan.
    It is way beyond the current “traditional budget” thinking, but keeps everyone’s eyes on the road ahead, not the road behind.

    Ed Hart

    November 29, 2010 at 8:50 am

    • Thanks Ed, and I totally agree. In fact you are touching upon the differences between the skills and attitudes of a Finance Director compared to some accountants, which I started to touch upon in an earlier blog, How an FD drives a business when sometimes Accountants are just catching up, http://wp.me/pQyUg-j, using a budget that just reflects the past is indeed just more of the same. Another favourite phrase of mine is if you keep doing the same as what you have done in the past, you will only get what you have already got.

      stevenmugglestone

      November 29, 2010 at 2:11 pm


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