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Budgeting

January 21st, 2012 No comments

Budgeting………… over the years, I have seen budgeting become this massive effort instead of it being the simple step of applying financial quantification to an annual execution plan.  So let’s go and look at the various opportunities for simplifying the process.

Opportunity I

Please do not merge the annual planning with budgeting process.  People, they are separate efforts.  Annual planning should be done after the strategic multi-year planning process.  Then the annual plan should be used as input to the budgeting exercise where the financial constraints are applied to the annual goals.  The trade-offs are then made based on the strategic goals.

When the financial planning is merged with the annual planning, people tend to become overwhelmed and/or decisions tend to be boil down to cost management instead of annual execution of the strategic plan.

And, let’s face it, the accountants already control too much of our life already.  Please don’t allow them to dictate how we do our jobs.

Opportunity II

This is one that I have seen happen more times than I can count and is a pet peeve of the budgeting effort.  When creating the budget, it is good practice to use the expenditure numbers from the previous years.  You do have that data don’t you?  So let’s look at this scenario.

We outsourced some work to a company and when we started, they only need to provide us with 10 folks.  If we assume that they charged us $20 per head per month, it would be a total cost $200 per month.  Then after five months we doubled the headcount to 20 folks, we would now be paying them a total of $400 per month.

So for the visual folks, here is what our expenditure looks like.

 

OK, so this is exactly like we thought it would be, a step up as we spent the money.  The numbers are in the table below, totally up to $1,000.

 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
0 0 0 0 100 100 100 100 100 100 200 200 1,000

 

Now assuming that we would want to continue the service, how much should we budget for?

Well the simple answer is, that spent $1000 this year and therefore the budget should be the same because we have a flat budget.  Then there are other that are asking about the duration of the project etc.  So here are some more assumptions that for the purpose of this scenario, I will define but as management, you really should be making these bets.

  • We will continue with the contract because they are delivering.
  • There will be growth; you need to decide how you want to forecast it…….
  • Assume no attrition

Of all of these questions, the biggest challenge will be how aggressive do we want to be be on the growth and how do we want to allocate it.  For the purpose of this example, I am going with 100% growth allocated across the four quarters.  This means that we will grow 25% of this years allocation every quarter.  Now the graph looks like this.

 

Again, no big surprises because it simply shows the continued expenditure and also the 25% growth every quarter.  Please note that they add up to $3,900 and therefore this will need to be the budget for the following year.  If you are being held to a flat budget, then you will need to prioritize and decide where to cut, this contract or elsewhere.

 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
250 250 250 300 300 300 350 350 350 400 400 400 3,900

 

Opportunity III

Doing the budgeting exercise without supplier or partner involvement.  In this scenario, the person doing the budget takes a guess, or maybe looks at a couple of websites to get an idea of the possible costs.  In many cases this is done because the person doing the budget does not know what the actual annual plan is and the idea is to get enough $ before embarking on the project.

Some other reasons why the budget can increase:

  • Off shore exchange rate
  • Up-leveling of the skills of the out sourced staff
  • Increased scope
  • increased coverage
  • Increased rates

In my experience, I have yet to have a supplier or partner account manager push back when I tell them I am working on budgets and need to understand what to budget for the following year.  Naturally I give them a month or two notice so that they can get things sorted out on their side.  This is especially key when dealing with off shore facilities because of the exchange rate fluctuations.

 

 

 

 

 

 

 

 

 

 

 

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