One thing that never ceases to amaze me – the difficulties that organisations have in setting their annual budgets, or even more amazingly, orgainsations that don’t even set project budgets! They continue to wonder why they experience cash flow issues throughout the year, and that projects cost them so much more than they expected. I’m not saying that by just having a budget everything is ok. I mean that but having a well thought through effective budget for normal operating conditions, together with your projects, you are much more likely to achieve your objectives.
I am a big fan of “bottom up” budgets – i.e. they need to be based on assumptions. I have seen many projects and business units completely miss their forecast expenditure or revenue by not have sound assumptions.
To help you overcome this often-difficult task, here are a few key ways to deliver a pretty accurate budget:
– Start with what is it that you want to achieve – your strategy/implementation plan for the year is the best base. This will guide your assumptions. For example, you may have no special projects, and have an ordinary operating year, or you expect to have significant office costs due to a relocation etc.
– Develop your baseline with your chart of accounts – its no good to develop something that you won’t easily be able to report against. The Chart of accounts doesn’t have to be pages and pages, but it’s a really good idea to allocate costs against these line items.
– Look backwards – as much as possible, get last year’s actual costs and revenue and review the year to see if there were any learning’s / events that will help your assumptions this period. Try to avoid the “last years budget plus 3%”!
– Develop the assumptions for each account, and write them down – 2 reasons: (i) so that the estimate has some basis, and (ii) so you can revisit, during the year or next year.
– Do the math – check the flow of costs too. While the budget will most likely be a profit and loss statement, you need to check the timing of the costs. A cash flow analysis is critical to ensure that you don’t run short of cash.
– Finally, do some analysis. Check you elements against last year’s budgets, and where you can, get some industry statistics too. They other thing that is often missed, check to see if things like superannuation amounts are correct (they are going up to 9.5% on 1 July 2014).
By being a bit analytical (that’s what I love), then you can have something that can help you achieve your objectives, and keep your stakeholder’s informed with your progress too.