A budget is a combination of several thoughts of an individual person if it is made unsystematically without a common goal. As a process, budgeting is done in many different ways. Far too often, I have come across people who think the budgeting process means filling in the budgeting spreadsheet mostly based on historical data. At least in smaller companies, budget figures are made far too often according to the old formula and then people start thinking about what really should be done when budget does not look so good.
Based on a vision
A budget should be based on a long-term vision that describes the guidelines for the future, development goals for business, and estimated timetables, which can be a few years. When the vision includes goals for a few years including numbers, then we have an excellent shared goal for the budget of one year. Budgeting is, after all, only one component of planning future activity.
Is a crystal ball required for budgeting sales? It may feel like this if the process is not systematic. Everything starts with the selling function; it must be possible to simulate this and make a reliable forecast of sales from the current sales pipeline together with historical data. In the budgeting of goods’ sales, the historical data and the market situation play a key role.
In the budgeting of project sales, there are two important elements;
- estimated closing date
The estimation of these two elements is improved by the good analysis of historical data and also the basing of the estimate on acquired experience. You gain experience when you continuously compare actual sales figures with the budget. The reporting of actual sales becomes important – especially being able to easily compare budgeted sales with actual sales for the same period. For example, there is no need to make a budget that is specific to a customer group if there is no report of actual sales of the customer group, in other words budget and measure the same things.
When the sales budget is completed, almost all of the rest of the items on the profit and loss statement can be calculated based on it. The sales budget includes information about the timetables of products to be delivered or income recognition of projects; these timetables can be used to determine the months in which sales turn into turnover.
The challenge of budgeting can be facilitated by building three scenarios;
- Best case
- Base case
- Worst case
Of these, the best case means all expectations are realised in an optimal manner. When so-called wishful cases are removed from this, the remainder is the base case, which should in fact end up as the official budget. The worst case is built by assuming that only some of the deals that seem sure will be realised. Going through this worse option often changes the base case into a more realistic one.
Goal presented in numbers
The budget is part of a longer-term vision and an essential tool for management. It can serve as the basis for planning resources and guiding business activities. When actual figures are continuously compared with the budget, deviations can be addressed immediately. In the current business world even this can be slow; active forecasting can make it possible to get information of possible need for change even sooner.
A budget that is made systematically is an insight of a company’s future goals presented in numbers. If you need any help with your budgeting process, please contact us.