It's That Time Again…Budget Time for 2014

The fourth quarter of the year is usually the time when budget & plans get finalized for the following year. Setting a plan for the year is extremely important.

Budgets and plans are important for executive management to set goals. It is also important for employees to know the goals and work as a team to achieve.

Here are a few tips for setting a budget and/or plan:

REVENUE
1 – Use foreseeable/signed revenue. Businesses with signed contracts into the next year should use this as the main basis for the revenue plan.
2 – Know the sales cycle & be realistic. Make sure that, when budgeting for new revenue, the timeframe and amounts are realistic. For example, a company planning on receiving government contracts should probably not plan for new revenue in January if the contract process is not too far along.
3 – Be cognizant of receivable cycles. If the accrual based budget leads to a cash flow forecast, make sure the timing of when funds are received accurately reflects the customer payment terms. For example, the expected accrual revenue generated in January may need to be assumed collected in March or April (especially if your customers are large organizations).

EXPENSES
1 – Use zero based budgeting. Many times, budgets are created using last year’s expense figures. This is usually not ideal. It is far better to start from scratch and focus vendor by vendor on setting a plan.
2 – Require lots of detail. The old adage: “the devil is in the detail” is true when budgeting. Make sure that the expenses are well thought out and lots of detail for each expense line item is documented.
3 – Create cost centers. Organize budgets based on cost centers and assign one employee for each center.
4 – Create “ownership” of budgets. Make people responsible for creating, tracking and authorizing the spending in their budget line item.
5 - Realistic & Agreed. Make sure that the final budgeted expenses are realistic and agreed upon by all parties before implementing.
6 – Incent employees to achieve (or beat) budget. Give financial rewards for employees who come in under budget.
7 – Report/Reward Regularly. After the budget has been approved, and 2011 is underway, make sure that the monthly results are regularly delivered to the team. Also reward the employees regularly during the year for favorable budgets.
8 – Allow for Change. Sometimes, events happen at an organization that makes the existing budget not achievable. For example, the company may bring on a extremely large project but also involve a lot more costs. Make sure that the plan is revised for the year and that the budget owner is responsible for the updated plan.
9 – Remember taxes. If a C-Corp, remember to include income taxes into your budget for March. Corporate tax payments are due by March 15th. If your company is profitable, this could be a large amount that will need to be factored into cash planning.
10 – Use financial metrics. Once finished, look to industry standards for budget reasonableness. If gross or net margin percentages look unusually high, they probably are too thigh - they probably reflect a cost that has not been accurately figured into the budget.