Painting a picture with financial budgets



More often than not, financial budgets aren’t used effectively. Instead of being a useful tool, staff see them as a bother and necessary evil. They paint a dull or even threatening picture. When this occurs, motivation is often eroded, and this can lead to the beginning of the end for some companies.

Financial budgets should paint a clear picture: a living snapshot of progress on financial components of a company’s strategic plan, rather than a list of targets that must be met. Budgets should be used in conjunction with staff reviews and other assessment procedures, to monitor the achievement of a company’s entire strategic plan.

Painting a pretty picture

There are several techniques to help staff see financial budgets as a useful tool. Firstly, budgeting should be a dynamic and open process, done in conjunction with developing and reviewing overall company strategy. The entire spectrum of staff should be included, allowing decision making to be influenced from the bottom up. This helps motivate staff and provides ownership of inputs and results.

Effective budgets allow careful resource allocation to maximise results and align with (not dictate) the strategic plan. Expenditure such as IT, marketing, capital expenditure and recruitment of staff should all be linked with the strategic goals. Senior management, supported by the finance department, can then ensure the budget works within the constraints of cash-flow and contingencies. Their goal: to balance the budget to provide sustainable growth.

The experiences and expertise of middle managers can often be missed in setting budgets. Involving them in developing your organisational strategy and objectives will provide much more useful results than if they’re only plotting progress. Allow them to think how they can help monitor its success, beyond simply filling in boxes on a spreadsheet.

Financial budgets should be seen as a monitoring tool: not a straightjacket of what must be achieved. Managers and even staff can have their initiative stifled by aiming to precisely meet budgets without any leeway. No financial forecast is perfectly accurate. Effective strategic plans, financial forecasts and staff should be prepared for this – and use variances to identify internal and market sector changes.

Developing a culture of accuracy rather than ‘beating the numbers’ helps ensure the budget holistically looks at your organisation and the processes within it – rather than individual staff members or departments. This helps avoid the culture of ‘us and them’ and silo mentality. Organisations should look outwards towards customers and competitors, rather than warring internally; and rewards should be linked to achieving financial and non-financial objectives relative to the market.

Financial budgeting and forecasting processes should be streamlined, to achieve greater speed and accuracy. Here at SouthWestfd and The Finance Department we have found companies were able to decrease their time spent on budgeting by an average of 22%, whilst increasing their profits by 11%. A win-win enabled by heightened awareness of priorities, performance, and communication throughout the whole business.

Companies should measure their performance against strategic goals and objectives throughout the year, including but not restricted to financial budgets. The frequency of monitoring depends on the size and complexity of the organisation, but should be carried out at regular intervals all year. The most successful companies monitor performance on a continual basis, applying fast response times and flexibility to market changes.

Condensing progress into one-page ‘dashboard’ reports of key performance indicators can help ensure company directors and senior managers have a picture they can easily refer to. This is one way the most successful companies are able to stay ahead of the game: having a continuous and live understanding of their performance, preferably linked to a risk register.

Blog by Jerry Davison, MD, SouthWestfd