GLOSSARY FOR BUDGETING BASICS:
OPERATING BUDGET: An operating budget details an organization’s projected revenue and expenses over a specific period, typically a fiscal year.
CAPITAL BUDGET: A capital budget focuses on planned expenses for long-term investments and assets, such as buildings, machinery, and major equipment.
BUDGET PRESENTATION: A budget presentation involves the formal discussion and delivery of an organization’s budget to stakeholders, such as management, finance, or a board of directors.
LINE ITEM: Every entry into your budget is known as a line item. They allow you to see exactly how money is being spent or earned, making it easier to make informed financial
The Budget Presentation
Presenting your budget is the most critical part of budgeting. If you do not present your budget well, it does not matter how much work you put in, how much you know your numbers, or how solid your budget is – you will not get the support you need to get it approved.
Rule #11: Find out what presentation format your reviewers expect as early as possible and stick to it.
Find out from your Finance department what format is used to present budget information. They probably have a predefined format for you to use – and it is probably the way that they want to see your budget (operating and capital) so that your budget rolls up with the other departmental budgets. Make sure that you are using the correct terminology for the various expense categories – and be prepared with back-up detail in an acceptable format. Ideally, preview your budget presentation with your colleagues in the Finance department.
Rule #12: Gather intelligence from others who have gone before you.
Unless you have the misfortune to be the first presenter, find out how things went with the other departments. What are the hot buttons? What are the issues for this year? Where were the tough questions coming from – the CFO? the CEO? Have detailed back-up charts with you for distribution to your audience. This is one of those times when an extra killed tree may save a life (your job).
Rule #13: All charts must tic and tie.
Never go into your presentation unless all the numbers foot (accounting term for matching up). Examples include:
- Consistent staff headcount
- Consistent bottom line budgets – Operating and Cap Ex
- Consistent detailed charts that foot to your budget line items
CFOs are like magnets, trained to dive in and find these inconsistencies. One small math error often causes the executives to lose confidence in all of the numbers presented.
Rule #14: Have year-to-year comparisons for all major categories.
Executives expect to see year-over-year comparisons with variance explanations, so have them with you.
Rule #15: Make sure that your outlook for the current year is complete and makes sense.
At the end of the budgeting process, step back and look at this year’s budget from a summary standpoint, compare it to last year’s budget and actuals numbers, and then ask yourself, “Does this make business sense?” If it does, then you are in great shape to proceed and probably only require rational explanations for the differences. If it doesn’t make sense to you, it certainly won’t to others, so ask yourself why and drill down to identify and address the problem(s).
I remember one year when I went in with my best budget ever. It was tied down tighter than a drum. I had a detailed back-up chart for every budget line item. I was the proud rooster. My budget was home run material. I got killed.
What happened? I never got to present the next year’s budget. I got killed on the current year outlook. What’s that all about? Let’s say that next year’s budget period is January through December. You usually start preparing for that budget in August or September with an eye towards having your budget approved by December. That’s the way it is supposed to work.
The reality is that as you put together your next year’s budget, you still have the rest of this year’s budget to forecast – often referred to as the Outlook for the current budget year. Here was my error: It was August, and my Cap Ex budget for the year was $30M. Through July I had spent $8M (recorded) with another $2M in the pipeline (spent, committed, but not yet recorded). So, with 7/12ths of the year gone, I had spent 1/3 of my Cap Ex budget. My outlook for the rest of the year was $33M. When added all up, my 12 direct reports felt that they could spend $23M in 5 months – not credible! I got shot and I never got a chance to present my budget.
Here’s another pitfall example: I had a training budget of $1.5M, but through August I had spent $700K. A bit low, but not as bad as the Cap Ex example. My outlook was to spend the full $1.5M. That was fine, but for the next year I was asking for $2M for training. On the surface it looked out of whack. When analyzed, however, I had a staff of 250 growing to 300, so I had 20% growth in staff and was asking for a 33% growth in training – a tough sell. A $300K increase request would have gotten by. I was reduced from a request of $2M to $1.8M, begrudgingly, but I should have known better.
THE RESULT OF THOSE GOLDEN RULES
What’s my point? It is all about credibility – if you have it, you’ll fly by; if you don’t, you’ll get nitpicked to death. That’s true of every aspect of your management role, but doubly so when it comes to budgeting.
Never let your Outlook get in the way of a good budget for the coming year. Always make sure that your year-over-year comparisons make sense with good business rationale for variances.
Budgeting is so important to the success of a manager that it is worth the time and effort it takes to make sure that you do it right.
Start with knowledge. Make sure you know what’s coming in and what’s going out and how to capture that data. Get help if you need it – either your boss can support you to do this or identify a peer in the finance organization who will be your mentor on this.
Think about how you will present your budget in the most persuasive way. Credibility is key. If you follow the rules that have been presented in this section, you will have a good shot at success. And lastly, always spend the company’s money as if it were coming out of your own pocket. This is a good rule for you to follow!