Budgeting is a straightforward process but there are a number of issues that companies still have difficulty with.
In fact, your company could be guilty of this common budgeting mistake….
The most common budgeting mistake companies make: Control and planning
There's a very fine between control and planning. Planning involves developing company objectives and preparing budgets to achieve these objectives. Budgets allow you to anticipate problems to establish where potential strengths and weaknesses lie in your operations for the next year.
On the other hand, control involves the steps taken by company management to ensure the objectives are attained.
And this is where lines get blurred.
'If, in control mode, you use the budget as a whip to 'beat employees' into shape, you'll find employees start to play games,' warns the Practical Accountancy Loose Leaf.
For example, they can increase expenses and reduce revenue because they know you, the manager, will change the budgets or hold them to achieving often unrealistic targets.
The number one role of a budget is planning. So, if you make the mistake of controlling your staff too much with your budget, you could end up with a budget that doesn't help you to achieve any plans. And that's because your staff members won't feel motivated.
Remember: 'Your budget is a control tool, not a control weapon,' warns the Loose Leaf.
So if you involve affected staff in preparing of the budget and create a budget that's realistic with targets your staff can also agree to, you'll have a very powerful planning and control tool.
How do you control when the planning has taken place
Prepare a comparison, at the end of each month, between your budgeted and actual results.
Evaluate the budget with your employees. Compare your budget with the figures your company has achieved.
Find out answers to these questions: Was your planning good? What did you miss? Where could you do better? What needs to change in the budget going forward to take into account the actual results achieved?
This way, your control mechanism is now a planning control, not a performance control and your staff will work with you to achieve budgeted results and plan for the future.