BUSINESS BITS

Watch those numbers
HENRY C. ONG

Budgeting is more than just putting numbers into your spreadsheet after you have made your business plan. It is definitely not an activity to be done only for a few days and then totally ignored afterwards. Instead, it should be part of a continuing planning process that constantly monitors and measures all of the business functions.

A good budgeting system is one that gets everyone in the organization involved in the budgeting process—from the business owner and key people all the way down to the employees. This is because budgeting is a very important part of goal-setting for the business. The process can eliminate a lot of confusion and misunderstanding in the organization.

It can also effectively impart the entrepreneur’s business goals and vision to the employees and provide them with a vehicle for voicing their concerns and sentiments about those goals and vision. Indeed, the participation of the employees in the budgeting process could help ensure the acceptance of those goals and vision and eliminate any pockets of resistance to them.

Once a budget is approved, you should make sure that it is immediately put to use. In particular, you can use it to analyze your financials. This is the evaluation of a particular business function by comparing its budgeted and actual results.

For example, assume that your budgeted salary costs for the previous year totaled P100,000 but your actual spending reached P150,000. You then can look for the reason for the variance of P50,000; you might find out that it was due to overtime costs that were not fully anticipated. In any case, the outcome of this process can provide you with valuable information for planning the next budget cycle and for keeping your business on track.

Of course, variances will occur when budgeted amounts differ from actual results. You need to trace the causes of these variances so you can correct employee behavior that is proving unproductive to the business. For example, you might discover that your food costs have overshot your budget because the staff has not been controlling your inventory properly. There may be times, though, when your staff is not to blame for the variances.

They may have been caused partially by your company’s lack of internal control. Whatever the outcome of the investigation, it is important that the performance evaluation be done in a positive manner. Perhaps you may even consider rewarding your employees every time they meet your budget; this is much better than the counterproductive short-term corrective measure of punishing them each time they fall short of that budget.

Indeed, budgeting can change certain behaviors, but those changes can be either positive or negative. Let’s assume that you have an incentive program that offers your salespeople a bonus whenever they achieve their sales targets. If those sales targets are reasonable, your salespeople would obviously be positively motivated; they will work extra hard so they can get their bonus.

However, if those sales targets are too high, your salespeople might get discouraged; they might think of those sales targets as impossible to achieve in the first place, so they might just give up without even trying. Thus, setting targets requires you to make sure that you have realistic assumptions, and such assumptions can sometimes prove very difficult to make. Even if you may not get it right the first time, though, you can improve your chances through continuous planning.

One quick way to do budgeting is to look at your financials for the previous year and adjust them by a certain percentage to come up with your budget for the succeeding year. For example, if your sales last year was P200,000 and you expect it to increase by 25 percent, you could set your budget for this year at P250,000. You can then adjust last year’s operating expenses upward by, say, 10 percent to compute your net income target.

This method is good for a start, of course, but the process should not stop here. Your team should thoroughly review the budget to find new ideas and creative ways of controlling your costs, and the inputs resulting from that review can then be incorporated in the final budget.

Making assumptions about the future is a critical part of the budgeting process. Based on experience, the probability is high that you will forget the assumptions you had made several months after you have finalized the budget.

For this reason, it is wise to always put your assumptions in writing. This way, you can always refer to the document when evaluating variances or when explaining your budget to your investors. This will also help you when you need to modify certain assumptions due to changes in the macroeconomic climate.

Now that you know how a good budgeting system works, you have provided yourself with a map that shows you how far your company has grown and how much further you would want it to grow. But always keep in mind that in budgeting, there is no absolute accuracy, only plain educated guesswork. Indeed, you should use budgeting more as a guide rather than as a control tool.

(Henry Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with INPACT International Network of Certified Public Accountants. You may reach him at hong@businesssense.com.ph or www.businesssense.com.ph.)