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How to move budgeting from an annual ritual to a tool that generates better results

It is that time of the year when you as entrepreneurs or finance professionals will be planning the budget for FY17 - 18. Your budget is a map. Here are some pointers as to how you could draw it.

MyCFO
Published: 10, Mar 2017

MyCFO is a leading Implementation services brand, which works with CEO's/CFO's and Finance teams of companies to improve the effectiveness of the Finance function through its CFO services and Finance Effectiveness Solutions.

Image: Shutterstock,com (For illustrative purposes only)
Image: Shutterstock,com (For illustrative purposes only)

It is that time of the year when you as entrepreneurs or finance professionals will be planning the budget for FY17 - 18. Here are some pointers that will help you plan more incisively and get an output which is not just an excel spreadsheet but gives you a real shot at moving your organisation in the right direction at the right pace. Make your budget reflect where you want your business to go and how you want it to grow. Take a conscious step back; see where you are and then, move on to see where you want to be. Or where you can be. Your budget is a map. Here are some pointers as to how you could draw it.

Make it opportunity driven – not just an incremental exercise While planning your budget, don’t just look at the existing P&L and balance sheet numbers, although it is a good place to start. Don’t ask if you can increase your numbers by 15 percent -25 percent from last year.  Incrementalism is an enemy of realising your business’ full potential. Understand your market and analyse where you are in it. How much of the market share does you company/organization have? How much of the market share do you want to capture for this year? For most businesses, the market share in terms of sales may be possibly 0.5 percent or 1 percent of the overall market. Thinking of ways to increase market share to say 1.5 percent - 2 percent will create a roadmap to increase business by five or six times. Too many entrepreneurs and even CFOs are guilty of simply looking only at the financial statements as a part of the planning process.  Budgeting is a business exercise not a financial ritual.

Let’s think more from an opportunity led perspective rather than an incremental (constraint led) perspective.

Include business drivers & metrics in your budget:
Far too often business plans and budgets are driven purely by financial metrics like profit, turnover and borrowing levels. What gets missed out in all of this is that accounting and financial metrics are a by-product of business metrics. Think about the business metrics that are key drivers for your business unit. Break down the business metrics to better understand all the factors that drive it. For example, sales metrics include sales volumes, pricing growth, customer stickiness, annuity in sales, number of sales channels, geographies that you are active in and those that you want to be active in. Productivity metrics like sales per salesperson, revenue per month, returns on marketing spends, revenue per geography per month. Consider profitability of each product or service, profitability in each geography and profitability by channel.  Understand the total capital that needs to be employed in a business unit and the return on capital employed for a business unit. Unless we really start thinking about some of these metrics, it’s very hard to map what the P&L and balance sheet will look like at the end of the year. Do a sensitivity analysis and see which factors in your business, when tweaked a little, give you a disproportionate value in terms of either turnover or profits. Use them to see if you can create optimistic, realistic and pessimistic scenarios. This will give you an idea of what numbers can be expected at the end of the year and will give you a better control over influencing business outcomes.

Fix accountability for execution of the plan:
Make your budgets realistically and with clarity. Detail your budget in terms of the people who are going to be executing the plan, their targets and Key Result Areas and the frequency of their review. Unless you start doing budgets on a weekly, fortnightly or monthly basis, it is hard to measure the actual performance against budgeted performance, align on planning learnings and to determine what and how quickly to pivot. Also, let’s not forget, it’s very rare to have entire accountability for any one area to be fixed on one person. The reality of business is there are too many interdependencies. Think through the interdependencies when you are planning your budget.

Thinking of budgeting as a business exercise helps you think of your business as an living, morphing entity and not just in terms of numbers. You can broaden your perspective and understand your market share and growth opportunities. It makes you think about what makes your business tick and putting metrics around them that will help you drive the numbers. Last but not the least, it allows you to reflect on the resources that you have at your disposal and those that you need to raise.

Wishing you the very best in Budgeting for FY17-18!

(- By S Venkat, co-founder, MyCFO. Views expressed are personal.)

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