What makes a meaningful budget?
- Aligned with short-term and long-term goals.
- Takes into account past trends.
- Accounts for more than what you plan to spend.
- Driven by strategy.
- Provides clear vision to your team.
An effective budget is not just numbers on a sheet. You want your budget to balance by year end, yes, but more than that you want your budget to provide leadership to your business or department.
If you are an executive or a department head, you may be thinking “well, I am the leader. Is it not my job to provide leadership?” Of course, it is. But think of a budget as a tool you can use to do so. If you set out your strategic priorities in your budget, it becomes a roadmap for your staff to act out your vision. It can help make tough decisions easier, guide the company towards growth, and, of course, let the business remain fiscally solvent.
Let’s say that in a strategy session you identified three main goals for the year ahead:
- Increase profit margin by 10% over next 18 months.
- Earn at least a 20% after-tax rate of return on our technology investment during the next fiscal year.
- Lower operating costs by 15% over the next two years through improvement in the efficiency of the manufacturing process.
Or, perhaps you are creating a project-specific budget and have identified the goal of completing the project in a certain timeframe. The goals you identify tie directly into your budget and key performance indicators (KPIs). For example, if you want to increase profit margins, you will likely be looking at reducing operating costs and increasing sales volume. Those items will need to be budgeted for and tracked.
If you want to make a technology investment in the next year, such as purchasing software to automate part of your administrative process, that will also need to be budgeted for and the money needs to come from somewhere.
When you set priorities and determine what is most important for your organization’s direction, the rest of the noise becomes a lot easier to manage.
What is a priority for your organization, that you can implement into your budget?