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PKF Texas – The Entrepreneur’s Playbook: Preparing Budgets – Why?

by | May 2, 2008 | PKF Texas - The Entrepreneur's Playbook®

Note: Running Fridays in FromGregsHead.comis a continuing series of tips brought to you by Greg Price. These run Saturday mornings during the BusinessMaker’s Radio Show on KPRC 950AM. Audio files can be found on the Entrepreneur’s Playbook page of the PKF Texas website.

Ask any four people in an organization about their budgeting process and you are likely to get four different answers. Some of those answers would include: “We did it last year,” “its part of the manager’s bonus calculation,” “We are trying to control expenses,” “It shows us our cash flow.” Truly successful organizations know that budgeting is one of the significant foundations for developing a high performing organization.

See if this sounds like your company:  Round 1 of the budget process starts with departmental levels submitting their guesses for obtaining next year’s financial results. Senior management usually knows what they want these numbers to be, but they don’t share it with the first line department heads.   The first round is usually returned with changes. Now armed with better financial information the departmental manager can guess at the numbers their superiors want and budget for it. Then the departmental budgets are consolidated and submitted further up the line for a second round of guessing.   

The problem with this process is that we now have a numbers guessing game going on, instead of a business plan. And we have given the departmental managers a way out of their estimates since the estimates weren’t theirs anyway.

Budgeting should be part of a performance management process. Budgets need to be linked to corporate strategies. How well is your budget and corporate strategy linked?

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