Which Challenge Do You Set Yourself?What is Your Mindset?
Different organisations have different mindsets when it comes to setting budgets, here are a few examples.
Thoughtless -“Let’s take what we did last year and add 10% to everything. Done”
Yes, your budget is finished, and yes there is a target there, but is it really meaningful?
No thought has gone into preparing it so it doesn’t really give any guidance on how you are doing and if you should be doing better or if you are really flying.
Easily Achievable – “We can do this”
Some thought has gone in to doing this, you have looked to where you are now and where you think your sales are going to be.
You have reviewed what you need to do and adjusted your cost structure accordingly.
This is fine, but is there any element of pushing yourself with this? Possibly you could do more, but you can always say that you hit your targets.
The Easily Achievable Budget is a lot better than the
Sandbagging Budget – “let’s keep something tucked up our sleeve”
This is probably one that businesses that are part of larger organisations try to do (but don’t usually get away with).
You work out a budget based on sales that you know you can get but don’t include some sales that you are pretty sure you are going to get, or that you know are easily achievable. Or, you have some costs in there that you know you aren’t going to spend.
At the end of the year you have exceeded your target and everyone is “happy”.
But, is there any element of pushing yourself with this? Possibly you could have done even more. You are left with a false sense of achievement.
Challenging – “We can do this, but it will take some effort”
Again, you have really thought about this. You have looked to where you are now and where you realistically think your sales are going to be. Then you have looked again. “If we want to add more profit to the bottom line, what can we do?”
More volume of sales, price increases, investing in marketing, investing in people, cutting out waste…
With this you are pushing yourself and you are regularly checking to see whether you are “on plan”. You may end up not hitting the target but that is not failure as you will have achieved more than if you hadn’t challenged yourself.
Unrealistic “Please sir, I want some more”
Difficult and probably not realistic. More likely to be found in bigger organisations.
You have created your challenging budget, fine tuned it so that you know it is hard, but with good luck and a following wind you can get there. Then Head Office reviews it and asks for another 10% on the bottom line. (possibly because they think you are sandbagging).
You can end up cutting costs that will damage the business or inflating sales to unrealistic levels. It may be that fortune favours you and the budget can be achieved. More realistically however, month by month you fail to hit targets and the whole company gets demoralised (even if still profitable).
These are examples of ones I have come across, there are probably more different mindsets out there. Which type of budget are you going to produce?
2nd January 2020