Making your budget operations more profitable

The corporate budget remains a controversial subject. Unnecessary for some, essential for others, it remains a necessary if not obligatory tool in many situations, particularly in times of financing. As with any tool, it's how you use it that determines the benefits you can derive from it.

For many companies, the approach of year-end also means the end of a financial year and the start of the budgeting season. So, I've decided to share my experience of several hundred different budgets with you and give you a few rules to follow to get a budget that's efficient, profitable, useful - almost fun!

1) Avoid detailed budgets

Expenses that represent less than 1% of sales should be globalized.

There's no point in having a line item for Pierre's cell phone, truck insurance #1 or a fishing trip with customer ABC.

2) Don't spend more hours annually making the budget than measuring it

You expect to spend about 3 hours a month reviewing the budget. You shouldn't invest more than 36 hours in budgeting. This applies to everyone involved in the budgeting process. The most important part of a budget is the follow-up during the year.

3) Having an expense budget is good, but having a cash budget and a projected balance sheet is even better.

Drawing up a projected balance sheet and cash budget is complicated in the first year. Their usefulness is often questioned. In fact, these tools will mainly determine how cash will be used in your business, whether you'll need a larger line of credit, or whether you'll be able to consider the investment you want to make. In general, managers take too much time establishing income and expenses, and not enough for cash budgets.

4) Delegate expenses so you can focus on management.

Knowing where the advertising budget will be spent is important, but it's even more important to know whether the advertising budget is yielding the expected results, i.e. how many additional sales for each advertising dollar spent. Good budget tracking helps validate whether spending is achieving its objectives.

5) Stay humble about your forecasts

Predicting a company's profitability is as difficult as predicting the weather next month. The budget should be a guide, perhaps a target, but certainly not a prophecy. In any budget exercise, significant variances are likely. It's the measurement of variances and the information derived from them that is most instructive. In the long run, doing the exercise enables decision-makers to better manage their risks when faced with the decisions they must make for the company.

In conclusion, making budgets without following them up closely brings little value to the exercise. It's the explanations for the variances measured during the year that make the budgeting exercise so useful.

GALION CONSEIL: CREATING VALUE FOR THE SMALL BUSINESS SHAREHOLDER.