Jeremy Fletcher, formerly interim director at Sage, G4s, and O2 and now CEO of consultancy Transform Finance, explains how to create a budget in record time
A clearly defined budget, built on sound information and guiding principles, will act as the financial guide to any organisation through each business cycle. In many organisations, budgetary work can cause a hiatus of confusion, disagreement and lost time created by a lack of co-ordination and planning.
However, it doesn’t have to be that way. By creating and agreeing clear, achievable and conclusive targets at board level, a business should be able to plan activities so that its final budget can be prepared, collated and approved in record time. The driving force behind most boards will be shareholders hungry for profit through growth and increasing revenue. Planning for this growth should be a perpetual focus of the board, and the conversion of agreed plans into budgetary models should be a straight-forward step.
The key requirements to formulate a clear and accurate budget are:
- Clear guidance on financial targets from board or executive management
- Issuance of simple clear templates to all functional heads with a definite timeline for completion and return
- Availability of key management for all critical and last minute negotiations and discussions.
The budgetary areas for most business will split into five key areas: revenues and margin, employee related costs, overheads, capex and finally other Balance Sheet items.
So, we have five days to pull together the annual budget …
The board has issued its budgetary directives, and the first step for the Finance team is to create the detail behind the company’s future revenue flow.
Budgeting for revenues would normally fall into three areas: new sales of established products, ongoing revenue streams (eg contracted revenue streams with deferred revenues) and revenue streams from new products. Revenue for established products should be easily forecastable based on historic data, current revenues and pipeline information – with due allowance for the impact of any new marketing push or other change that may impact growth.
The trickier part in forecasting revenues is around sales of new products. Here, there is no sales history to give a guiding light, and it must be for the Sales and Marketing teams to produce detail by product, ensuring that there forecast meets the expectations of the board.
Whilst the revenue budget is under construction, a first snapshot of departmental headcount needs to be created fully considering any changes in scale of revenue or any change in cost base. A simple template distributed to department heads will need completion and return to the finance function with a clear Day One deadline.
This is the day to lock-down the revenue numbers, as they are driving the bulk of the P&L, thus allowing the finance team can begin the analysis of the head-count inputs received on Day One.
Almost invariably, the largest cost for a business is related to its people: pay, travel, company cars. On average, these costs represent approximately70% of an organisations overhead budget, and therefore the area that needs most attention when planning the annual budget workload.
Again, a simple template sent in advance to the departmental heads is required to garner key information: requesting information on head-count growth, pay increases, timing of any new recruitment. The template should be accompanied with guiding notes on expected sales growth, and other expectations from the board.
Once the finance team have reviewed the completed templates, without exception, the employee cost won’t add-up to the desired total: too many heads, pay increases too high, unrealistic expansion of the workforce – all issues that need further discussion and consideration. With these points in mind, the budgeting team will need to work quickly and closely with HR and functional leaders to agree final changes to the headcount, the rate and scale of recruitment, annual pay-awards and other factors impacting the total employee cost.
A further day of negotiation and arm-wrestling on employee costs resulting in numerous recalculations and scenarios to find the formula that meets with the agreement of the management team AND reconciles to the board’s directives.
With the revenues sealed, and the headcount numbers starting to take shape, now is the time to take a more detailed look at the other overheads: marketing spend, IT, facilities costs.
In reality, the marketing spend is often a pre-set percentage of sales revenue. However, the agreed expenditure will need to be broken down into sub-categories such as PR, promotions, advertising and events, and with a detailed time plan against each category. Usually, once the total spend has been agreed, by working closely with the marketing team, their budget can quickly fall into place.
However, the IT spend can be much more complex, breaking down into three core categories: requirement for current employee base, additional spend for additional employees and costs and capex relating to strategic programmes.
The employee related IT spend should be easily calculated against current spend with all due allowance for any planned upgrades in desktop technology, plus an increase for any additional headcount. Strategic programmes should be known plans that have been discussed and agreed at management level and are already known to the finance function as part of a routine capex approval process. These programmes should already be supported by detailed business plans, making the role of the accountants easier in terms of budgetary planning.
If there has been no change in facilities (ie no change in the number or use of buildings) then costs for the new financial year can be largely based against previous year’s expenditure, with some allowance for any change in headcount. Consideration would also need to be given to rental agreements. The same approach could be taken with utility costs.
For new and additional buildings, there will have been considerable work in calculating the costs of the buildings at the time of purchase of rental, and these figures would form the basis of the new budget.
The employee costs should now be finalised, allowing the budget team time to focus on the detail of all elements of the P&L and ensuring revenues, costs, profit tie back to the directives given by the board. Inevitably, there will be final elements to be agreed and renegotiated, but the P&L budget should now be as good as complete.
Using well-constructed templates, and formulaic assumptions (eg pay creditors in 45 days, debtors pay in 50 days), budgeted P&L transactions can be automatically reflected as Balance Sheet movements giving a theoretical budget for assets and liabilities.
Capital expense will need a more considered approach, again with each function completing a basic template of requirements. Any capex requirement would usually require sign-off from the board or executive management anyway, so information on capital requests should already be freely available and under the control of the finance function. Only additional requirements would need further consideration in terms of the budget.
The final day for tidying-up any outstanding items, closing any last disagreements and arguments.
With all elements of the budget covered, the finance team can spend the final hours of the week polishing the final detail, uploading information and preparing presentational information before dissemination across the organisation.
Of course, more complex businesses will have more complex needs, but the principles remain the same: forward planning, clear instruction, team focus. Combine these elements with strong and clear leadership and the budget process can be reduced to a slick process without placing huge administrative burden on the organisation.
Jeremy Fletcher has held positions as interim director at notable companies including Sage, G4s, Royal Caribbean, Yodel and O2 and is the CEO and founder of transformation consultancy, Transform Finance, specialising in crisis management, turnaround, management re-organisations and structural issues, among other areas.