But however good or bad you are, there are some golden rules to keep in mind when preparing your next budget.
- Research your market thoroughly. It’s easy to be too inward-looking and so forget the wider picture. Yet many of my clients have identified niches during the budgeting process.
- Make sure you evaluate your competition
- Involve all of your key people in the process. It can be a real motivator for them to participate – and you benefit by not doing the whole wearisome thing yourself
- Use realistic and conservative assumptions
- Adjust the budget upwards and downwards – ‘flexing’ – to incorporate all the significant changes in your basic assumptions, such as your sales levels and gross margins. What would happen if you lost a key customer?
- Ensure that it includes a profit forecast, cash flow and forecast balance sheet. I find that including these three quickly identifies inconsistencies and basic errors.
- Rush into it. Your budget will only be as good as the information you have gathered beforehand, both from within and without your business. Obviously, there isn’t a fixed rule about this, as it depends on the size and complexity of the business, but six weeks is a good indicator as to how long the whole process should take.
- Ignore the competition
- Do it by yourself
- Forget about the possibility of economic changes: inflation, interest rates, taxation and labour supply. The absence of these so-called sensitivity analyses is a common weakness in budgeting.
- Over-estimate demand for your product or under-estimate the cost of labour and supplies. If your budget is based on hiring five new people in six months’ time, what will happen to you business if you can only find three of them? Finding good staff has been a real barrier to growth, particularly among service businesses.
- Ignore the advice of your colleagues and professional advisers
Written by Tony Perkins for the May 1997 published edition of Real Business.
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