Planning and Budgeting for The New Year

Although the leaves aren’t even off the trees yet, when it comes to running a business, the new year is just around the corner. Whether you have begun to plan for next year or not, this article will show you how to use planning and budgets to meet your company’s goals.

An annual plan and budget will put you more in control of your business. It will help you establish clearly defined targets, get everyone singing the same hymn and foster accountability in all your employees. And last but not least, it will improve cash management: A budget will ensure that the company’s cash position will be sufficient to reach its goals.The following steps focus on accountability and communication, two themes that will make your planning process highly effective in meeting the company’s goals.

The Steps
1. Develop and distribute a summary business plan for the upcoming year to your management team.

2. Ask departmental managers to develop their own plans and budgets.

3. Budgets should be submitted to the president or CFO for review and returned to the managers with comments and/or changes.

4. Compile the approved plans into a master budget and create a cash flow budget. Make changes to the departmental budgets if necessary, if, for example, cash is a problem or if profits are not where you want them to be.

5. Distribute the final budgets to your management team — but give them only as much information as you are comfortable giving.

1. The Summary Plan

Before you start putting down the numbers, you need a summary business plan for the upcoming year. The business plan does not have to be very elaborate, but it should demonstrate the overall direction your business will take in the upcoming year. Your plan should contain a brief analysis of the market and how it affects your business. For example, what changes do you need to make to meet the changing marketplace or your revenue and profit goals (e.g., pricing, distribution, product mix)? Based on those answers, what are the requirements of the various business functions (e.g., sales, marketing, operations, finance, etc.) based on the above? Note: You should welcome input from key employees throughout this exercise. They are intimately involved in your business. Also, listening to them and considering their suggestions will create the key ingredient to any successful group project — “buy-in” from all the participants.

2. Detailed departmental plans
Provide a “package” to each manager containing the plan, a list of their responsibilities, a template for their department’s budget and prior-year information. With the combination of the summary plan and prior-year information(You can estimate figures for the rest of 2005), the managers are now in a position to develop a more detailed plan (it should be no more than one page) and budget for their department for the upcoming year. Budgets should be prepared on a monthly basis (some monthly amounts will simply be the annual budget divided by 12). Ensure that every revenue and expense item, including capital expenditures, is assigned to the manager who is most in control of that expense. Remember that individuals, not departments, are accountable. Depending on the size of your management team, the above questions could be addressed by you or other members of the team (combining Steps 1 and 2).

3. Review

Review each departmental plan and either revise it, send it back to the manager with comments or tentatively approve it. Make certain that each plan is consistent with the summary plan and that each budget is consistent with the departmental plan (e.g., additions to staff are reflected in the budget).

4. Compile

Compile all of the departmental plans. The most important things to check for are net income for the year (is it consistent with your goals?) and monthly cash balances.

5. Distribute final plans and budgets

Distribute the plans and budgets to your managers and employees. How much information you give to each is up to you. However, remember that the more information you provide, the more decisions will be aligned with the company’s goals.

Using your budgets during the year

Now that you have a budget in place, how do you make it an effective tool? Most accounting programs enable you to enter a budget and assign each revenue and expense item to a class or category. When you prepare monthly financial statements, you can run a report that compares your actual sales and expenses to your budgeted figures. You can also run reports by class or category. Be sure to review monthly as well as year-to-date variances. Provide the reports to your management team and require them to explain any variances.

Remember, budgets are tools used to communicate and hold people accountable for meeting the company’s goals, not inhibit them. If your market has changed and/or opportunities arise, by all means revise your budget. Similarly, do not reward people strictly for meeting or beating their budget; rather, reward them for hitting their goals (and meeting budgets are a part of an employee’s goals).

Tips and Tricks:

Make sure your goals are attainable (particularly those that are top priority). Stating goals that are not reasonable will reduce the effectiveness of the plan and budget and create frustration and disappointment.

Even if you are reading this article in the middle of your fiscal year, you should still go forward with a plan and budget because not only will it help you with the second half of the year, but the process of creating and using the budget will make it a more effective tool for next year.