Thursday, April 29, 2010

Preparing a Budget

As a manager, you are expected to put together a budget for your department each year. Your compensation may depend, to a large extent, on your ability to stick to that budget. So it's in your best interest to create a realistic budget when you start out.

Begin by setting goals. An ambitious manager wants to improve her division's performance over the previous year, increase net income for the company, or decrease costs—maybe even all three. How do you think your department can accomplish everything it has set out to do? That's where the budget comes into play. After all, a budget is a plan with numbers.

Start with a list of three to five goals that you'd like to achieve—and put a completion date on them, too. For example:

  • Increase gross sales by 5% by June 30th.
  • Decrease administrative costs by 3% by end of fiscal year.
  • Reduce inventories by 2% by the end of FY 99.
Be sure you know the scope of the budget you're supposed to produce. Scope implies two things: the part of the company the budget is supposed to cover, and the level of detail it should include.
  • The smaller the unit that you're focusing on, the more detail you need. If you're creating a budget for a 12-person sales office, you typically won't need to worry about such capital expenditures as major upgrades to the building or the computer equipment. But you should include estimates of what kinds of office supplies you'll need, and how much they will cost.
  • As you move up the organizational ladder to include more people and larger departments in your budgeting, your scope broadens. You can assume that the head of the 12-person office has thought about paper clips and travel expenses. You're looking to convey the broad-brush outline, what the minute details of all the units' budgets add up to.
Other issues to consider:
  • Term. Is the budget just for this year, or the next five years? Most budgets are for the upcoming year, with quarterly or monthly reviews.
  • Overview. Does your budget need to be accompanied by an overview of your strategic plan—for example, your plans for increasing sales or market share? If so, you need to be prepared to defend it.
Take a hard look at your assumptions for the coming year. After all, a budget, at its simplest, takes current data, adds assumptions, and creates projections. Let's suppose you think sales will rise 10% in the coming year. If that's true, you may have to add two more people to your unit. But when you get before your budget committee, be prepared to defend your assumption that sales will rise 10%.

Role-playing may help you here. Put yourself in the position of a division manager with limited resources and many departmental requests for funding. How can you make your case for two additional staff members so that the division manager grants your request ahead of all the others?

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