By Guest Author: Heather Smith
Budgeting and cost control can be useful business tools when used properly, but if used arbitrarily, there are practitioners that believe you might be wasting your time. Let’s take a look at the pros and cons of budgets and what makes this tool controversial.
Table of Contents
The Pros
Neethu Stephen, the founder of Evalua8 Corp, believes budgeting and cost control are “essential to ensuring business success”. According to Neethu, budgeting provides a “clear process around knowing how much to spend and being able to track and see if [spending is] over or under and why.”
Budgets can also help determine if “what you are about to embark on is worthwhile,” says Simon Rowe, Partner of Milsted Langdon.
Utilising these tools assists the business in having a conversation around budgeting and cost control, which helps them to both stay focused on their goals, and potentially alerts them to future issues they can plan for.
The Cons
As Michael Ford, CEO of Castaway Forecasting points out, “If [budgeting is] done as a purely financial maths exercise, the many dangers outweigh any benefits”. Richard Peel, Director of AFP Services Limited, notes that “Budgets in small businesses are dangerous [because] they can stamp out opportunities to grow. Sorry, no budget for that this year”.
Implementing budgeting and cost controls is definitely a time-consuming exercise, and some staff may try to work the system, by including a comfortable buffer in the proposed figures, or spending unnecessarily, as there is budget available.
How to Effectively Use a Budget
There is agreement among advisers that, when used, a budget should be reviewed quarterly, at a minimum. Zoë Lihou, Client Accountant at De Garis Accounting Limited says budgets can be “the key to either your success or failure. Cost control is impossible without ‘cost knowledge’. By this I mean, know your costs, understand them, what drives them and whether your business needs them to exist and maintain current capacity and turnover. Then, and only then, are you able to consider affording growth.”
“A well-designed forecast process is a powerful exercise in planning and business design. It focuses the client on the future and creates an agreement between client and adviser about what is expected to happen,” says Ford.
The Controversy Behind Budgets
One of the biggest issues surrounding budgets is the unknown future element. Sherrell T. Martin, Chief Financial Solutions Officer of Nitram Financial Solutions has some advice about the unknown. “Deal with them as they happen. Don’t become overly stressed and hyper-focused on something that hasn’t happened or may not happen. Take it one month at a time.”
A budget is only as good as what it’s being created for. If clients are creating budgets without knowing the reason behind them, they will be useless as a performance evaluation tool.
While a budget can be useful when used properly if the process becomes arbitrary, it’s best to review the reasons for implementing with the client, and provide some education to their team on effective budgeting rollout to ensure clients still receive the benefits.
Heather Smith produces a bi-weekly Accounting Apps newsletter. Learn more and subscribe on her website.
