By now, some businesses have completed their 2021 budgets while others are still crunching numbers and scrutinizing line items. As you put the finishing touches on your company’s spending plan for next year, be sure to cover the finer points of the process.
This means not just creating a budget for the sake of doing so but ensuring that it is a useful and well-understood plan for everyone.
Buy-In from Management
Management teams are often frustrated by the budgeting process. There are so many details and so much uncertainty. All too often, the stated objective is to create a budget with or without everyone’s buy-in for how to get there.
To put a budget in the best position for success, every member of the leadership team needs to agree on common forecasting goals. Ideally, before sitting down to review a budget in process, much less view a presentation on a completed budget, you and your managers should have established some basic ground rules and reasonable expectations.
If you have already started creating a budget, it may not be too late. Call a meeting and get everyone on the same page before you issue the final product.
Account for Variances
Many budgets fail because they rely on purely accounting-driven, historically minded budgeting techniques. To increase the likelihood of success, you need to actively anticipate ‘variances.’ These are major risks that could leave your business vulnerable to high-impact financial hits if the threats materialize.
One type of risk to consider is the competition. The COVID-19 pandemic and resulting economic impact has reengineered the competitive landscape in some markets. Unfortunately, many smaller businesses have closed, while larger, more financially stable companies have asserted their dominance. Be sure the budget accounts for your place in this hierarchy.
Another risk is compliance. Although regulatory oversight has diminished in many industries under the current presidential administration, this may change next year. Be it health care benefits, hiring and independent contractor policies, or waste disposal, factor compliance risk into your budget.
A third type of variance to consider is internal. If your business laid off employees this year, will you likely need to rehire some of them in 2021 as, one hopes, the economy rebounds from the pandemic? Also, investigate whether fraud affected this year’s budget and how next year’s edition may need more investment in internal controls to prevent losses.
Eyes on the Prize
Above all, stay focused on the objective of creating a feasible, flexible budget. Many companies get caught up in trying to tie business improvement and strategic planning initiatives into the budgeting process. Doing so can lead to confusion and unexpectedly high demands of time and energy.
In the end, you are looking to set a budget — not fix every minute aspect of the company. Our firm can help review your process and recommend improvements that will enable you to avoid common problems and get optimal use out of a well-constructed budget for next year.