Managing your budget

Posted on

Rate this Skill Pill
Rate this Skill Pill

This is where prudence and practice part company, even although they share the same destination: you must make budget. Failure to do so is a career limiting move. Prudence and practice are two different rou tes to the same destination.

Prudence says you manage your budget conservatively. A simple rule is the 48/52 rule: aim to spend 48% of your budget and achieve 52% of your sales (or tasks) in the first half of the year. Once you have worked out what this means for the first half of the year, then apply the 48/52 rule again to the first two quarters of the year.

The prudent approach means you give yourself a chance of beating budget. Just as important, it enables you to deal with any crises and unexpected events which may occur later in the year. You build in a safety margin into your operating performance.

The problem with the prudent approach is that it makes you a prime target for the year end squeeze, which comes around as regularly as Christmas but rarely brings any presents. The squeeze occurs because there are always some units which overspend or under deliver: everyone has to be squeezed to make up the short fall. By the time the year end looms, it is too late to make up ground in the market place, so the only realistic response to the squeeze is to cut costs. As ever, short term savings can lead to long term costs, so you need a way of insuring yourself against this.

The practical approach to managing budgets looks something like 51/53. You still want to get ahead on sales and outputs if possible. If you can achieve 53% of your goal in the first half, that is a good start. But you also need to find a way of protecting your spending. Since you know your budget will be squeezed in the last quarter, it makes sense to have no discretionary spending items left in the last quarter. In practice that means you have to spend ahead of the curve, selectively. That is not prudent, but within reason, it is practical. For instance:

  • Make essential investments early in the year: these might be test markets, technology spend, market research and the like.  Remove them from the coming squeeze.
  • Spend discretionary items which are dear to your heart early. If you want a conference for all your units and team members, don’t schedule it for the last quarter.
  • Commit budget where you can. If you have advertising planned, make sure the media spend is committed. Advertising is a soft target for bosses who do not understand that cutting advertising kills your brand and your sales.
  • Build a slush fund. Since you know there will be a squeeze, identify in advance where there is some fat to be cut. Simple acts such as delaying the start of new hires by a few months will allow you to build up reserves which can be released when you have to.

Finally, remember that once the budget is set you have entered into a contract with your bosses. You have to deliver on your commitment.  Budget blues are the driver of much management angst, pressure and grief. Manage your budget tightly from day one and you have a chance of minimising the grief at year end. If you are falling behind on budget, act swiftly. Cut fast to get your running rate of costs down: the longer you leave it, the greater the cumulative gap becomes and the less time you have to recover. The earlier you deal with your budget crisis, the smaller it is.

Leave a Reply

Your email address will not be published. Required fields are marked *