Budgets are topical if not popular right now for two reasons: in the UK, our Chancellor of the Exchequer (Government Finance Director) Rishi Sunak has unveiled made his annual budget statement this week, and secondly as we move into November and the end of the calendar year, finance departments in many organizations start talking budgets with their operational colleagues.
Arguably Rishi Sunak’s UK budget is the more fictional. It certainly was in 2020, when he revealed his budget with around £12billlion of ‘support for UK business’ in early March, only to reveal a lockdown inspired further £288 billion some 2 weeks later.
But let me not be too hard on him: anything about the future is unknown, and so has a fictional element to it. This is, I believe one reason budgeting is not seen as a topic to make the heart sing and spirits soar. Indeed, it is frequently viewed as a task to put off, or complete in the speediest manner, never mind the result.
Yet I argue there is virtue in the one thing you can be certain of.
The actual figures will be different to the budgeted ones.
That will be the case with Rishi SDunak’s UK budget too – and the same with your organisations,’ and your own personal budget too. You do have one, don’t you?
When training teams on budgets, here are 10 points I use to make the process more realistic and the output of the exercise more useful.
- There are no rules: you can put anything into a budget. There is no right or wrong way of doing a budget – back of an envelope through to multi page Montecarlo simulation style spreadsheets & pivot tables.
- Just because you can put anything into a budget does not mean you should.
- Top Down or Bottom up? Start with the income, usually at the top – or do you start with your costs/expenses, then work out what income you need? It does not matter – do it which way suits you.
- Incremental or Zero Based? Incremental is where you adapt last year’s numbers. With Zero based you start with a blank sheet – paper or spread – and only put in costs if you absolutely cannot avoid it. In practice you may need to use a bit of both incremental and zero-based philosophies, especially with an established business. If you are starting a new venture you must start with a clean sheet as there is no history to be incremental with.
- Actual will be different to budget – that is normal. The crucial point is not the variance/difference, it is the actions you take as a result which determine your eventual outcomes.
- Your budget is a flight plan. Most aeroplanes spend most of their time flying off course, the pilot (human or auto) takes actions in response to get them where they want to be. Your budget will be ‘off course’ most of the time – see 5) above.
- Are you pilot or passenger? Passengers sit and enjoy the view and do not look at the flight plan regularly. The pilots watch the plan, the reality, and take action – or decide not to.
- In an organization, if you are the pilot, your CFO/Finance Director is Air Traffic Control. So, while there are no rules and you can put anything in a budget, you need some consistency with your colleagues – the other pilots flying with you. The CFO/FD may suggest you do your budget ‘this way.’
- If your CFO/FD is Ar Traffic Control, then Rishi Sunak/the Government is the equivalent of the Civil Aviation Authority. Someone needs to maintain some kind of overview.
- “It’s not in the budget” may be factually correct but is insincere. You can put anything in a budget. If you hear those words, they really mean ‘You have not convinced me this should go in the budget.’
Enjoy your budgeting. Or even if you do not enjoy the budget process, enjoy the flight. Your job is to get you, your colleagues & your organization to where you want to be. I am confident the next 12 months will not be as planned, but your budget is a tool to help you know which way you should be heading.
Buzzword of the Week – Valuation
Definition – The analytical process of determining the current (or projected) worth of an asset or a company. There are numerous methods used. Placing a value on a company may look at the business’s management, capital structure, future earnings, and market value of assets, among other metrics.
Other methods such as the capital asset pricing model (CAPM) or the dividend discount model (DDM) may be used.
Alternate View – Remember what you are really buying in business, whether an asset or another company: you buy the future cash flow it will generate. As you are buying your evaluation of the future, the valuation process should reflect this. The result though is timeless: an asset, or company, is worth what someone is prepared to pay for it.
Coming Up…
I will be attending the upcoming Professional Speaking Association meeting in Birmingham on November 1st: https://www.thepsa.co.uk/regions/birmingham-region/
On Tuesday 2nd 9.30am I am running a free training on Pitching for Finance in association with Business Ready at University of Warwick Science Park. There are still places available and you can register at https://www.warwicksciencepark.co.uk/events/pitching-for-finance-webinar-business-ready/
Next week is the main event of the Chartered Institute of Personnel & development – their Annual Conference & Exhibition in Manchester. I will be there both on Wednesday 3rd & Thursday 4th – let me know if you would like to meet if you are there too.