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The How to. Series
3. How to prepare and manage a budget
by Mark Richardson and Carl Evans
The first two articles in this series appeared in e.manager February and March 2008 editions
and the next will be featured in e.manager May 2008.
Introduction
The budget is an Administrative Managers primary tool for planning,
controlling and making decisions regarding resources and operations.
It is therefore fundamental to the effective and efficient management
of the administrative function that the budget is carefully developed
and subsequently proactively used to control activities.
Preparing the Budget
All organisations have their own distinct approach to the preparation
of budgets, and a clear recognition of the process adopted will be
essential at the outset.
There may be a temptation to take last years budget and simply
adjust for the forthcoming year in line with inflation. While this may
have some attractions, it is rarely satisfactory, since business
environments (both internal and external) are increasingly dynamic
and the precise range of activities is subject to change. In addition,
costs rapidly become out of date, as evidenced by recent rapid
increases in energy prices. Clearly, a more sophisticated approach
to preparing the budget is required.
The development of a budget should start with the business plan
for the department or section. This will detail the activities for the year
and specify clear goals and objectives. This breakdown gives a
framework within which to apply revenue (if applicable) and costs. The
costs are typically detailed into staff costs, training and development,
maintenance of fixed assets (such as building repairs), energy costs,
consumables (such as stationery) etc, depending upon the type of
organisation and industrial sector. As the business plan will have
undoubtedly been developed with the support of the administrative
team leaders, then they should similarly contribute to the development
of the budget. From this, a rough-draft budget will be derived.
Inevitably the overall health of the organisations budgets will
impact upon the development of a realistic budget. If an organisation
is growing more rapidly than expected, additional costs may have
to be built in to the plan. For example, a budget for temporary staff
may have to be included in anticipation of later full time staff
appointments. At the same time, if an organisation is in decline, or
seeking significant efficiency savings, this will have to be reflected
in any budgetary proposals. Organisations may, for example, impose
a 95% budget for staff costs, effectively limiting the capacity of
managers to replace exiting staff.
It is important to re-examine the first draft of the budget against
the business plan to see if anything has been overlooked. It is also
important at this stage to identify any limiting factors, i.e. those factors
that could affect or limit the achievement of the objectives, such as
anticipated level of sales. Budget lines may have to be adjusted in
order to take these into account. Additionally, the rough-draft can
now be compared to last years budget to see if there is any significant
difference, which again could highlight an omission, or at least require
justification to senior managers throughout the planning process.
By adopting this approach, managers ensure that each element
of expenditure is reconciled back to the business plan, and thus the
budget becomes an integral part of the plan. As a result, factors
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affecting the administrative environment will have already been
considered, along with the what-ifs, such as the impact of a
significant rise in interest rates.
Administrative Managers might feel inclined to build an element
of slack into the costs in anticipation of the budget being
subsequently reduced by the Financial Director or Budget Committee.
However, this should be resisted, since the reconciliation of the budget
with the business plan, and the adoption of a zero-based approach,
should reduce the likelihood of a reduced allocation. Nonetheless,
the Administrative Manager will have to effectively present the budget
to convey this message. An eye for the politics which will inevitably
surround the budget process is always an asset!
Managing the Budget
Once the budget allocation has been agreed, it is important to
establish clear links with the person responsible for the budget in
the finance department. This will hopefully develop into an effective
working relationship over time, and provide a point of contact for
queries or issues as they arise.
It is useful at this stage to examine the budget-reporting format.
For example, how are the figures conveyed and how are annual
costs apportioned (monthly or annually)? The format can often be
modified to make it more informative to the budget manager and
other recipients.
Include the budget as a monthly standing item on the team
meeting agenda. This will support collective responsibility from the
team, rather than the budget being viewed as the sole liability of
the Administrative Manager. It also brings greater knowledge to the
investigation of variances (differences between the budget and the
actual spend), and should result in team agreement for any corrective
actions (such as reduced spending on photocopying).
Allocate sufficient time each month to analyse the budget
statement it is an important document. Upon receipt of the
monthly budget statement, a swift check should be made of all
items to make sure they have been correctly allocated. It is easy for
an invoice to be mis-coded to the wrong cost-centre and you dont
want to cover another departments costs! Then investigate any
variances (positive and negative) to determine cause, and consider
any necessary managerial actions. This might range from doing
nothing at the moment, other than monitoring the situation,
through to updating the budget or business plan. Any trends
developing over the months should also be investigated, and actions
considered before a substantial problem does occur.
As the accounting period elapses, a bigger picture emerges. It
may be necessary to vire (move amounts) across the budget
headings in line with actual spending patterns (for example an over
spend in overtime may correspond to an under spend in agency
staff). A dramatic change in trading patterns, or unforeseen changes
in the business environment, might necessitate a re-drawing of the
budget or business plan. However, this usually needs senior
management involvement and authorisation.
>> Continued on page iv
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