THE budgeting process can seem overwhelming, and some employees may feel it is a waste of time. However, when leaders take the time to develop budgets aligned with their organisation’s mission and values, the budgeting process can unlock value and help the company maximise effectiveness and profitability. What is needed is a way forward.

Budgeting is not a top-down process; it requires input from all members of the organisation. Beginning with the master budget at a high level, Reid examines the supporting budgets that flow into it, such as those for sales, marketing, depreciation and amortisation, and capital expenditures, and he provides a step-by-step process for putting it all together. Each step in the budgeting cycle — from budget preparation to approval, execution, and evaluation — is explained in easy-to-follow detail.

There are systematic processes for evaluating the performance of employees and managers, including integrated information systems, key performance indicators (KPIs), and auditing and quality controls. By applying repeatable, standardised methods using the right data, leaders will have the tools they need to create a durable pathway to organisational success.

Section A: Strategic direction and budgeting

The budget-preparation process can be lengthy, but it must be done. The input from every leader and department is critical to budget preparation, as it helps produce a more realistic budget. While some leaders may take a top-down approach to preparing their budgets, they must remember that the execution of the organisation’s budget is not solely dependent on them. Therefore, the involvement of other employees will be essential if the organisation wishes to have a successful year.

The vision and mission for the organisation give it direction and determine what products and services it offers. Organisations often face competition, but when they know the reason they exist and what they plan to accomplish, they will concentrate their energies and resources in the right direction. Competition is often good, as it allows leaders to improve their performance and also the performance of the organisation.

Leaders must prepare a realistic revenue budget. To achieve the revenue budget, the marketing budget must be well coordinated to reach new and existing customers. Therefore, the promotion mix must be designed to keep customers informed, address their needs, and encourage them to spend their money on the products and services the organisation offers.

Employment and production costs can be significant costs in the overall budget. These costs must be carefully analysed and, where necessary, reduced without compromising quality. The acquisition of an Integrated Information System and advanced technology can reduce many of the manual tasks and may result in the organisation experiencing increased profits.

Depreciation and amortisation charges will be calculated for existing and new assets. Taxation charges must be computed and paid over in a timely manner. If the organisation borrowed funds for its operation, then finance costs must be included in the budget.

Managing accounts payable, accounts receivable, inventory, and capital-expenditure budgets is important for the cash-flow budget. Without sufficient funds, leaders will not be able to execute many of the items they have budgeted. Having an effective credit department will assist the organisation in approving credit to reputable customers and in following through with those customers to settle their outstanding balances in accordance with the credit agreement. Acquiring assets will increase efficiency and enable the organisation to compete.

Leaders must carefully manage inventory and accounts receivable so as to minimise impairment and write-off costs. These two non-cash expenses can erode an organisation’s profit. Before inventories become obsolete, leaders can arrange for items to be sold at reduced prices so as to recover some money. Every effort must be exercised to get customers to settle their balances in a timely manner.

Section B: Performance management

Every organisation needs a budget to guide its future direction. However, the planned activities must be evaluated. There must be a system to capture and evaluate the performance of leaders and their departments. Their performances must be evaluated regularly, so that appropriate actions can be taken to enable the organisation to fulfil its plan.

Many leaders have embraced the need for an Integrated Information System that will provide them with accurate, timely information. The reports from the Integrated Information System will give leaders the opportunity to evaluate their performance against the budget for the same period.

One example of an internal report is the monthly management accounts, which allow leaders to evaluate their performance on a monthly basis. The management accounts must be supported by commentary. During meetings with leaders, the management accounts may be discussed, and leaders will be required to provide responses to their fellow colleagues.

To make meetings effective, leaders must plan and set an agenda. To manage the meeting time, leaders must submit written reports in advance and provide a verbal summary during the meeting.

The organisation’s performance can be evaluated using several reports. These reports are generated internally but will be used to provide external parties with an understanding of the organisation’s overall performance for a specific period.

The owner and Board of Directors are expected to evaluate the performance of leaders and provide them with feedback. Their feedback is intended to help the organisation meet its mission.

Each leader must take responsibility for their department and Strategic Business Unit, as the performance of these units will affect the organisation’s overall performance. Whenever more resources are needed to help leaders improve, those resources must be provided in a timely manner. Leaders whose performance is below the budget will need support and guidance. If they fail to meet their target, then training can be an initial tool to help them. Leaders whose performance is above the budget must be acknowledged and rewarded. The organisation needs leaders who are ethical in delivering their duties. The success of the organisation is not dependent on a single leader, but on the positive contributions of all leaders.

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