No one starts out building a house without a plan. In the same way, profitability is more likely when an entrepreneur creates a detailed plan. Without the big picture view, you can’t put together the little pieces: If you have ever tried to put together a puzzle without the big picture on the box, you know what I am talking about. A budget is like the picture your business patterns itself against. There are nine steps I recommend an entrepreneur should take in creating a budget that increases business efficiency and profitability.
Step 1 – Strategic plan: Vision, mission, goals & objectives
Developing a budget should begin with knowing what direction you want the organization to go. Start the strategic process with what you want your organization to look like 10, 20, 30 years from now. What would you like your business to stand for? What kind of values should team members exhibit. How will your organization change your customer’s life? How will your existence make their life better? What good can you contribute to the world? The answers to these questions form the vision and mission for the organization.
The vision and mission are then broken down into goals and objectives for the strategic period. A business should have one focus area at any point. It is good practice to try to look at least five years into the future and then choose a focus area each strategic year.
Step 2 –Define critical success factors and key results relevant to the objectives
Critical success factors are the things the business must get right to meet the strategic objectives. In addition to the critical success factors, you must clearly define the key results you will like to see. Clearly defining what results are targeted reduces confusion in the future. See example below:
|Strategic objective||Critical success factor||Key result desired|
|1. Increase the value of assets serving clients. ABC’s biggest assets are its website and knowledge base. ABC will like to see this serve client more efficiently and generate more revenue.||Eliminating paid advertising by developing frequent, high value content & distributing. This content strategy is at the core of ABC success||Increase revenue by 20% with no paid advertising. Increase the average value of customer purchase by 92%|
Step 3 – Quantify the key result desired
In the previous step, we defined the key results we will like to see. In this step, we calculate the estimated figure for the key result. This is done by using last year’s financial statement as a basis of making our objective. See the example below:
|Proposed/ Quantify||Prior Year||Key result desired|
|Total Revenue||$ 11,600,000.00||$ 9,666,666.67||Increase revenue by 20%|
Step 4 – Industry analysis
Compare targets with industry results. Research to see if the targeted result can be further optimized based on industry data. Make any adjustments necessary from your industry research.
Step 5 – Delegate responsibilities
Identify parties responsible for achieving these results. It is the team’s responsibilities to plan the activities
required to achieve the key results. Last year’s activities can be used as a springboard for planning the current period. Once the key activities have been identified, there must be a way to identify progress. This is where Key Performance Indicators (KPI) come in. KPIs are designed to measure the change towards the desired goal. This makes it easier to identify challenges and obstacles along the way and make provisions for handling them. It is important to get buy-in from the people most affected by the results.
The KPIs main goal is to make the connection between the objectives and action. Employees/ team members should be able to self-monitor themselves using KPIs and targets as a guideline. For instance, if 200,000 phone calls are required to make a $100,000 in sales, then a KPI will be number of phone calls made. If the planned level of calls is not made or the calls are not producing the desired results, actions can be taken before any adverse effects take root. KPIs have a cause and effect relationship to the critical success factors. KPIs must be within the responsible party’s control. KPIs are the measurable link between actions and desired results.
Step 6 – Allocate resources
No amount of analysis can help a business achieve its key results if it does not align its resources accordingly. The budget will show the difference between where you want to go and where you are and whether you have enough resources to bridge the gap. If the resources are not enough to support the planned activities, the team must revisit prior steps and adjust accordingly. For example, if the team planned to do 1,000 phone calls per month but the resources available can only support 800, the activity level will have to be reduced accordingly and the key result goal should be adjusted to reflect the new planned level of activity.
The allocated resources become line items on the budget. For example, if an activity for 200,000 phone calls are planned, then you better make sure you budget for enough sales reps to make the calls.
Step 7 – Create a reporting system
Determine the frequency and party responsible for reporting the KPIs. Technology can play a vital role here. But, technology should be used as an accelerator and not the strategy. Reporting the right KPIs at the right time will help focus attention in the right direction. Reporting should be with regular frequency: The top KPI should be reported daily while the supporting KPIs can be reported weekly or monthly.
As part of the reporting system, an index of contributions must be designed and posted in a place where responsible members can easily access it.
Step 8– Monitor regular
Continuously monitor the change over time quickly noting where the change is not moving in the expected direction. Remember to celebrate wins and not just point out errors. This keeps people in the system motivated.
Step 9 – Continuous improvement
If target is repeatedly being achieved, it might be time to evaluate if the business can do better with higher goals. Continuous improvement is not a onetime activity. Success is a process and not a destination! When you stop moving forward, you start going backward. There is nothing like remaining stagnant. There are so many areas that make a business work so focusing on improving a few things at a time works better than trying to work on everything at the same time.
Download an example budgeting workbook