Indeed, budgeting can change certain behaviors, but those changes can be either positive or negative. Let’s assume that you have an incentive program that offers your salespeople a bonus whenever they achieve their sales targets. If those sales targets are reasonable, your salespeople would obviously be positively motivated; they will work extra hard so they can get their bonus.
However, if those sales targets are too high, your salespeople might get discouraged; they might think of those sales targets as impossible to achieve in the first place, so they might just give up without even trying. Thus, setting targets requires you to make sure that you have realistic assumptions, and such assumptions can sometimes prove very difficult to make. Even if you may not get it right the first time, though, you can improve your chances through continuous planning.
One quick way to do budgeting is to look at your financials for the previous year and adjust them by a certain percentage to come up with your budget for the succeeding year. For example, if your sales last year was P200,000 and you expect it to increase by 25 percent, you could set your budget for this year at P250,000. You can then adjust last year’s operating expenses upward by, say, 10 percent to compute your net income target.
This method is good for a start, of course, but the process should not stop here. Your team should thoroughly review the budget to find new ideas and creative ways of controlling your costs, and the inputs resulting from that review can then be incorporated in the final budget.
Making assumptions about the future is a critical part of the budgeting process. Based on experience, the probability is high that you will forget the assumptions you had made several months after you have finalized the budget. For this reason, it is wise to always put your assumptions in writing. This way, you can always refer to the document when evaluating variances or when explaining your budget to your investors. This will also help you when you need to modify certain assumptions due to changes in the macroeconomic climate.
Now that you know how a good budgeting system works, you have provided yourself with a map that shows you how far your company has grown and how much further you would want it to grow. But always keep in mind that in budgeting, there is no absolute accuracy, only plain educated guesswork. Indeed, you should use budgeting more as a guide rather than as a control tool.
Henry Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with INPACT International Network of Certified Public Accountants. You may reach him at email@example.com or www.businesssense.com.ph.