Build a Better Budget
by
Barry Glauberman
Glauberman & Associates LLC
By building a well-thought out budget and using it as a road map for your business, you can make the difference between your company’s long term success, and its failure.
Building a budget means building a plan that includes all operating expenses, capital expenses, and revenue for a given period. Many companies are tempted to focus on revenue first, however, based on our experience, by focusing on expenses first, you’re actually forced to develop a more realistic revenue plan. Here are some important considerations when building a budget:
Maintain a centralized approach and get the entire management team involved. You want to be sure everyone has a stake in the budget – the more perspectives you get the better the budget will be. Realizing the CEO, COO and CFO are all accountable for overall company performance, the company will be better off if the budget process is managed by an experienced finance professional, one whose title and function may vary depending on the company, but whose charter is always the same: to protect the financial integrity of the company.
Focus on cost first. Why focus on costs first? Managers know what functions their team provides. However, they need to focus their budget efforts on determining what resources they will need to get the job done, and how much these resources will cost. Once they have a good understanding of this they can assemble a good budget. If they need to make adjustments later on, that’s fine.
When you know the cost structure, you can build a more realistic (and more accurate) revenue plan. Once you know how much it will cost to run your core business operations, you can then draw up a more detailed revenue plan. The revenue plan will be built on realistic cost expectations. Sales and marketing budgets will be tied most closely to the revenue plan, so they will likely require a number of iterations as you develop your comprehensive revenue plan. Other areas may also require additional adjustments, depending on the outcome of your revenue plan.
It’s ok to make adjustments along the way. Your business changes every day, and this impacts priorities and how you’ll spend cash. Although you don’t want to fall completely into a reactionary mode, there will be times when events necessitate re-doing or updating the budget. There’s nothing wrong with that. The key is to design the budget as user-friendly as possible, so it can become a “living and breathing” tool, one that helps management run a successful business.
Be realistic about the time horizon. Time horizon may vary by company, but generally you want the time horizon to align with your company’s strategic plan and initiatives. A detailed two year budget plan is usually sufficient. You want the budget to be detailed enough so that you can see the impact of your team’s tactical decisions toward meeting your company’s strategic goals.
Be realistic about the amount of time and number of iterations necessary to build a better budget. This will depend on your management team’s capabilities and comfort level in dealing with budgets. Some managers may need several iterations (and numerous meetings) to get to the “right” budget. Others may nail it their first time out.
Focus on the process! The budget process itself forces managers to think carefully about their business or department. It makes them plan for what may or may not happen. They may not be able to account for all contingencies in the budget, but the budgeting process helps managers begin thinking about “unexpected” developments, so when they occur, a contingency plan is close at hand.
Building a better budget, and living by it, can lead to good things. Running a profit-making business, acquiring additional capital, and even realizing a successful exit are all direct benefits of having a top-notch budget and budget process. It enables management and potential investors to have access to vital information, so they can make smart, informed decisions.
Glauberman & Associates LLC advises companies, venture capital/private equity funds, and other investors, with particular emphasis on building financial and strategic plans and models, executing mergers & acquisitions, developing and implementing turnaround and restructuring plans and exit strategies, raising capital, and serving as interim management. Managing Director Barry Glauberman has over 20 years of experience in management consulting and industry. Barry has served as an investor, portfolio manager, and adviser for a $150 million corporate venture fund. He has significant experience in both the technology and telecommunications industries. Barry began his career as a management consultant with A.T. Kearney Inc. and Arthur D. Little Inc. serving Fortune 500 clients in a variety of industries. He earned an MBA in finance and marketing from the University of Chicago Booth School of Business, and a BS in industrial engineering and a BA in economics from Rutgers University.
For more information please contact us:
703-264-9093 (office)
703-966-3911 (mobile)