Filip Stefanovic
29 jul 2020
We covered the basic elements of how to draw a budget from scratch, the next topic should be how to control it.
What we will cover in this post:
Introduction to budgetary control
Necessary skills to do so
Budgets faced by managers
Action check-list
What should managers avoid when controlling the budget?
Introduction to budgetary control
In simple words, controlling the budget means comparing actual vs estimated revenue and costs. This means comparing the actual inflow and outflow of monetary funds at the present moment to the historical time when you actually set down the budget from scratch. In other words, checking if the reality matches your estimations.
When the moment for evaluation comes, usually some actions have to be taken into account to correct certain elements to stay within the budget outline or a plan. This factor also depends on the fact:
How the budget was set?
Have you considered scenarios from the previous post?
Is the budget plan realistic or not?
Are you cost-sensitive or not?
Can you absorb the cost without any consequences or differences within the budget?
Disclaimer: This is a multi-factorial thing, period! It will always depend on a project basis. Don't stress about this, if you did your homework and you spent time on drawing up the budget you are more than fine. NOBODY CAN MAKE A BUDGET FROM SCRATCH WHICH IS PERFECT. Anyhow, "controlling the budget" is really important for all manager jobs out there. This skill is highly valued for organizations that are considered as start-ups, as well as, for those corporations which are considered as "well-oiled" machines with a serious labor force. It is a measurement of control in all departments.
Budgetary control is a foundation for business management and also scaling. The most important goal/objective for this section of budgeting is basically to have controlled spending to achieve your project/company goals. Because you always want to maximize your revenue or net profit, depending on your ultimate goal and who is your target audience (investors, market, executives, etc.) Therefore, creating a framework or plan is of huge importance, because it will give you some perspective of where did you go wrong with your estimations and final spending. This means the budgetary control is utilized the best if you have a formalized system for reporting the expenditures and income. My advice would be to create two different docs. In a sense, always keep the plan as a separate document from the actual budget (which is showing real expenditure and income). By doing this, you can see how successful you were in your estimations and what you can improve when you face this challenge again. Trust me, you will face it again! It will give you a certain point of view, where do you stand and how to improve;
For you to control the budget successfully, you need to sharpen your rather simple skills. Also, you need to understand what kind of budgets you will face as a manager or a business owner which needs to provide details for investors.
Therefore let's cover the necessary skills, as well as, the types of budgets faced by managers.
Skills
Let's have a look at skills that are necessary to have for budgetary control:
Gathering of information from phase 1 (drawing the budget)
Usage of the information which was estimated and how it correlates with real spending.
Ability to map out warning systems for over expenditure
Not being afraid to take decisions (for example: cut costs, trying out new things)
Setting up monitoring aspects.
Budgets set by business owners for managers to control
There are various types, but I will number a few of them which you can face the most frequently. These types of budgets are covering most of the aspects of budgeting that you could face in real life. However, there could be more specified budgets, but consider these as an umbrella. Managers usually control:
Income/Revenue budget
Expense Budget
Cash budget
Asset budget (Another term: "Capital expenditure budget")
Project budget
Fixed vs Variable budget
Departmental budgets
Investment budgets
Action Check-List for budgetary control
To make it more approachable and useful to all of you, I would like to create a checklist for you, so you are aware of which things you need to consider when you create a measurement of controls. It should help you how to tackle and approach control.
Check-list:
Read carefully all of the figures.
Understand the figures. Define what you control, what somebody else controls. Usually, all figures are interconnected! So if you are not accountable for all figures. Keep that in mind!
Check with your department accounts the validity of the information. Check the info! Always! You should always delegate components which will save you loads of time. However, be careful about what you receive and ask for confirmation. Also, it helps out to keep good contact with all stakeholders to give this feeling of teamwork! Asking the right questions is not a shame. Accounts who are leading the departments maybe have some input or analysis, which are not represented in the figures. So always talk to people and take notes. By doing so, you can maybe predict a change that is not reflected yet. Maybe you can add it as a note to potential investors or your bosses.
Trace the confusing number backward (reverse engineering). If something is troubling you, you are not understanding how that number came out like that. Go backward! Check ledgers, understand the background of how it was derived. It is a complex process. Mistakes are rather frequent! Use software and paper traces (Depending on the company). Check details of transactions. In big corps, the software is tracing all expenditure/bills/income with details.
Set warning systems! Basically, this relates to confusing numbers, you have to find a way how to trace back the warnings. It will help you to track outflow and inflow of funds.
Set up monitoring principles. Same principles like warning systems, just different scope. Create a framework for how and who should be responsible to monitor and check the budget.
Set timeline of appropriate dates when the budget should be monitored and evaluated Should not be every day, let the budget adjust itself, but not too much! weekly/monthly/quarterly/yearly. This is a delicate situation where you have to find a silver lining. What's enough, but not too much. Especially in accounting principles, some things are not instant! Don't expect them to be.
Understand the difference between estimated VS real.
This is the part where you reflect on the two docs I mentioned. This can give you a sense if you are going in the right direction or not!
Identify and compare variances Why do you have variances? Where did you go wrong? Or have you estimated something wrong? How big of a difference is there? Create a rule of thumb! What is an acceptable variance and how to tackle those levels?
Don't be blinded with positive variances. (Maybe they are wrong, don't fly around)
Don't be depressed with negative variances. (learn why that happens, this is more important than overachieving)
Talk to the right people Especially when the problem occurs. Define who are those individuals! Boss? Investors? Your colleague? Managers?
Create an action list of how to tackle the problem. Priorities which things are more important to tackle and justify. It's crucial to justify because you will have protection for a decision you made.
TAKE ACTION!!! This is explanatory, nothing will happen if you don't adjust to the issues which you identified!
Monitor the changes which you applied Solo or with your team, check if those changes were appropriate and useful. Evaluate if this was the right decision.
COMMUNICATE THE CHANGES TO EVERYONE! Communication is the key for everyone to understand what is the current status. People overrule this issue as a "not so important" factor. But 90% of problems (from my experience) come from miscommunication, it affects the whole business.
Record every change in the written format. Transparency is the key, including written evidence for people who are not in the room. Try to reduce misinterpretation as much as possible!
What you should avoid
Acting without planning, thinking, validating
Not talking to stakeholders
Not evolving throughout the budget
Not involving people in your decisions
Not communicating changes and decisions in written format
Ignoring huge problems
Not delegating duties
Delegating duties to people who are not competent to perform something
Remember! Measure Twice, Cut Once!
If you have any questions, doubts or you believe I missed something important, let's discuss it! Put your opinion in the comments or send me a message! I hope I helped. Best, Filip Stefanovic