How Efficient Is Your Business Budget?
Budgeting for your business or organization, when done right, is an important part of an efficient and responsible financial strategy. You can check the health of your budget process with the following questions:
Do you have a budget? Some organizations resist budgeting because they feel they can’t accurately predict their future expense needs or income. This is a fair point in volatile or new businesses, but it’s not a reason to eschew budgets. You need to understand how much you can spend or you may find yourself facing a stack of bills you literally cannot pay.
Budgets don’t have to be carved into stone. You can set relative targets and update a budget as a living document (in a spreadsheet) as you take in additional income. The point of a budget is to make sure you pay attention to individual expenses and that you don’t exceed your ability to pay at all.
Does every department have the same budget? This is a sign that those budgets were not set thoughtfully. It’s rare for every department to have the same expense needs, and it’s destructive to assume that they do.
How is next year’s budget determined? Is last year’s number simply carried over? Is there a change request process? Are last year’s expenses analyzed to determine whether individual departments spent their budgets responsibly?
Never reduce budgets on the basis that last year’s budget was not spent in full. This invariably leads to one result: Every department will spend every last allocated dollar regardless of whether they actually need to, which equals a tremendous amount of waste company-wide.
Consultants are sometimes hired not because a group is concerned about increasing its efficiency, but because it has to find something to spend its budget on or it will lose those dollars in subsequent years.
Do departments have input into their own budgets? Sometimes otherwise-democratic organizations assign budgets in dictator fashion. Each department should really suggest its own budget for final review, rather than the top-down approach of sending each department a prepared budget and asking for feedback (or, worse, not accepting feedback!).
How well did each department—and the company as a whole—stay within budget last year? This is the single-best signal as to whether your budgets are accurate. Wildly exceeding budget is also a big problem because it places the entire organization at risk for literal bankruptcy.
Where is the budget tracked? This should be as transparent as possible. If everyone in the company can see that marketing is already past its annual budget and it’s only March, that can stem the flow of cash better than a litany of meetings and administrative policies.
Is your budget flexible? An ironclad budget can get in its own way if an emergency situation, or even a large cost-savings measure, comes up a couple months after the budget was set. You need to have a side door policy for approving changes in a documented and responsible way.