The often-abused business budget

A lazy ‘last-year-plus’ budget is an exercise in futility and bad management, but worse is to enter the new financial year with no budget at all.

The often-abused business budget
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I never cease to be amazed at how many farmers fail to prepare a detailed annual budget, and if they do, how badly it is done.

A well-managed budget is a tool with the power to lift profit and grow the business. No manager worth his or her salt should ignore it.

READ Tips for running a farm’s finances in tough times

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The term ‘budget’ means widely different things to different people. To add to the confusion, we have the ‘zero-base budget’, popularised by Minister of Finance Tito Mboweni.

He is hailing it as the key to stopping government’s wasteful ways, and getting it to spend money on what’s needed. But first, let’s look at the ordinary, basic budget.

A budget in a nutshell
A ‘budget’ is a detailed financial plan for the year ahead. It’s your best shot at what’s going to happen, month by month, item by item, during the next 12 months, and it enables you to see what the overall financial result will be if things turn out as planned.

What a budget is not is a page or two of numbers that the boss and accountant have drawn up and passed to their underlings with instructions to comply. Developing a proper budget is a collaborative process, involving all the staff responsible for its various components.

The outcome is a document to which everyone has contributed. If well managed and implemented, it creates a clear, common vision of who has to do what to achieve the desired results during the year ahead.

As the year unfolds, it will become clear which assumptions used for the budget were wrong. A drought or flood may occur, prices may perhaps be higher and costs lower.

READ Your seven most important financial needs

These changes are taken into account for the forecasts, which keep track of the eventual outcome for the year.

Forecasts should be generated quarterly. All staff who made inputs into the budget need to re-estimate the income and expense items in their areas, and these figures should be used to generate a forecast.

‘Forecast one’ (F1) is produced three months into the budget period, ‘Forecast two’ (F2) six months, and ‘Forecast three’ (F3) three months before year-end.

High-quality forecasts enable you to track financial variations to come, and take the actions necessary to keep the business on track.

Finally, there are two golden rules about a budget, which, if broken, destroy its usefulness or, worse still, cause damage to the business:

  • An annual budget, once finalised, is cast in stone. It draws the finish line for the year, just like the finish line of a race, and once the race is on, shifting it makes no sense. Terms like ‘revised budget’ or ‘restated budget’ are nonsense!
  • Never use the budget as a target against which your staff are rewarded. If you do this, you’ll reduce the budget preparation to a round of negotiations instead of a creative discussion looking for ways of doing things better.