Streamline Training & Documentation: Business Acumen VII: Planning via the Operating Budget

Thursday, September 21, 2006

Business Acumen VII: Planning via the Operating Budget

I remember how surprised I was some years ago to discover during a research visit to a cable TV operator in Alabama, that the department heads were in the dark about how to draw up a budget for their parts of the organization. The general manager had recently decided to get his direct reports involved in putting the annual budget together, but quickly learned that the process was a mystery to them.

Although I haven't been back to the Alabama cable operation, I suspect — based on what I've observed at other organizations — the situation has improved. Nowadays, most department heads are expected to contribute quite substantively to the annual budgeting process.

Contemporary problems with setting the operating budget tend to involve disconnects between the budget and the all-important task of planning effectively (and dynamically) to achieve the organization's goals for the coming year. When planning and budgeting are tightly linked, the budget allocates resources in the way management has determined is most likely to produce success in meeting the goals.

Key issues to focus on are:

opportunities for growth

taking steps to support your organization's differentiation in the market

controlling costs without violating the spend-money-to-make-money principle

increasing returns on the capital invested in the business

After the management team has completed a situation analysis, drawing up the budget involves answering three central questions:

What is a reasonable projection of revenue for the coming year?

What are the variable costs associated with generating these revenues?

What are the fixed (overhead) costs for the year?

Once the budget has been drawn up, it can be used to help track progress in meeting the year's goals. It is especially helpful to analyze the root causes of differences between what was budgeted and what actually happened. For instance, the market environment may have changed, a competitor may have made an unanticipated move, quality problems may have developed, a downturn in customers' businesses may have led them to pay your organization more slowly, etc.

Obviously, this post is not intended as a tutorial on budgeting. Its aim is to encourage using the budget process very consciously to design the resource allocation most likely to produce success in achieving the business goals for the year.

For some additional detail on the budgeting process and other aspects of running a business, you can visit this UK government site. The "Budgeting and business planning" page seems geared to small business, but the concepts apply to an organization of any size.

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Labels: Business acumen

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