This is the fourth in a series of blogs on how to turn corporate budgeting into a valued management activity. In the last blog I covered associating budgets with business processes. In this blog I will look at how splitting up the budget into fixed and variable items can improve the budgeting process. Within any budget there will be items whose cost (or income) is known a long way in advance. Things such as rents, loan or other contractual payments and some taxes will be set maybe years into the future. For most of these, there isn’t much that can be done so for budgeting purposes, these items should be separated and dealt with without wasting anyone’s time. However, other items will be variable, i.e. their value is:
- Much harder to predict or maybe unknown (e.g. heating costs that are weather dependent)
- Linked to the amount of work performed (e.g. travel expenses linked to the number of sales calls)
- Dependent on the timing of other activities (e.g. project stage payments)
- Discretionary (e.g. the attendance at a trade show)
As a matter of interest, David Axson in his book ‘Best Practices in Planning and Performance Management’ found that high-performing companies restrict the number of budget measures to around 40, compared to the average organization that budgets around 240 measures. When it comes to monitoring actual results, the level of detail increases but the comparison with budget is only performed at a summary level. This was found to be a far more accurate and efficient way of predicting costs, which also helped focus management attention on to the things that were more strategic and important.
- Select measures to be planned based on their impact on strategic goals. (Do you really need to budget for stationary when total office expenses would be just as good?)
- Identify those measures whose values are ‘fixed’ and those that are ‘variable’.