5 Shortcuts to Easy Budgeting for High Performance LeadersMar 04, 2022
Even as I say the word “Budgeting” I know it will trigger some of you who don’t like numbers/money/budgeting at all. If you have historically struggled with numbers or don’t like getting into the detail of it all - I’m going to make it really simple.
As a leader, tracking to budget is one of the key measures and getting this right is essential.
And disclaimer - I’m not a financial advisor and I don’t work in finance - these are just the insights I have learned along the way that have worked for me, and don’t in any way constitute financial advice.
When you start in a leadership role, this generally comes with an allocated budget as you inherit a team with functions, and all the budget that sits within that.
Likely at your organisation, once a year there is a big budgeting drive where all of the forecasts are calculated, and once that is agreed, the new financial year will start and you get to track your budget monthly.
New financial years can be the same as calendar years or alternatively may align with one of the quarters - eg 1 July to 30 June; 1 October to 30 September.
Let’s start with how the budgeting is carried out.
Generally if you already have a team in place, the current budget is carried over to the next year as the forecast, with any variables that need to be applied. So that mean, unless things are changing, you’ll likely have close to your current budget in the next year.
Here are some of the things that are included:
- The number of people in your area, either full time employees, or part time, or consultants, or contractors, or managed workforce - etc, etc. This is about how you run your area, what your operating model is (and by operating model I mean how many people you have and how they are structured to complete the outcomes for your division/team).
- Costs that you can’t change, eg rent, insurance etc - apportioned for your area and these are called fixed costs.
- Then you might have other costs (for example I work in IT so we have technology costs, licensing fees for that technology, hardware replacement, depreciation etc, and of course any costs directly associated specifically to the work that you are in.
- Things that can be offset i.e. if you distribute costs, which would be a credit in your budget.
Sometimes you’ll also get a “stretch” which is where your budget is being reduced and you need to understand what levers you have to accommodate that.
Here are 5 simple shortcuts to help you effectively manage your budget.
- Make sure it makes sense to you first.
I know this sounds obvious, but hear me out. As a leader, you might be a layer or two removed from the actual spend, so you need to get into enough detail to have a level of understanding of your costs.
An easy way to do this, is to break it down into logical areas.
Approach your budget team by team - and if you only have one team, approach it function by function.
This will also make it easier for you to identify any gaps as you sense-check the numbers.
And if you have managers or other leads in your team, they need to be involved to cover off their areas and provide you with detailed insights.
- Start with the people
Use your org chart to get clear on whether all the people are represented.
The cost for people (salary) in the budget might not be the actual salary of your people as this is sensitive information, and is more likely the cost associated with each grade or band. So you might need to sense-check that it’s in the ballpark.
Consider whether you need to add more people because your function has changed (and reflect on how you will justify this, do you need a business case, etc).
Do you have any vacant roles, and are these factored in?
Are you having to pay more to roles where there might be skills shortages?
The trick here is to understand your cost base for people and know where your spend is.
Managing a stretch: If you have a stretch target, the people budget is a great way to leverage costs through looking at your operating model and seeing how you can gain efficiencies, through not filling vacancies, etc. You might want to look at other teams in the organisation doing similar functions to see if there are any efficiencies gained by joining forces.
- Then move to your Other Costs
You want to sense-check each area to ensure that your costs are correct, and if you don’t have many “other costs” this is normal - I’ve seen many teams with people costs and then not much in the “other costs” section.
In tech, we have system costs, licencing costs, and from a commercial perspective we’d look across the organisation to understand what other teams have licenses with the same vendors and to align those into an Enterprise licensing agreement to get efficiencies and drive cost down.
Essentially what you are checking here is whether you have the tools and capability built in against each function, to ensure that it can be carried out effectively.
Also check if you have any budget that has been transferred into your area that you can leverage?
Managing a stretch: If you have a stretch target, see how you can leverage suppliers e.g. can they do more work for less or the same money? Are there licensing models or other areas that you can leverage to reduce costs? What other things can you leverage to achieve your stretch?
- Write your Narrative(s)
Finally, take these learnings on a team by team basis, and write a narrative for each area, which you’ll roll up into an overall narrative for your team.
Total budget for my team is $2.2m and this is broken down into:
x10 people, doing the following function [insert whatever these are - $x], for a total cost of $1.8m.
Fixed costs relate to $100k.
And the balance of $300k relates to marketing costs.
Managing a stretch: If you have a stretch, you would call that out separately eg the marketing costs include $100k stretch which will be applied through reducing our contract with a vendor.
How simple is that? Your narrative is key, not only for discussing with Finance or your Boss, but also for adding to your Resume and being clear on the details when you interview for your next role.
- Tracking your Budget
Once you have a going in position, the budget will go through several rounds of approval before being put into your financial systems.
When the new Financial Year starts, you will need to review your budget regularly (eg monthly) to ensure you are tracking well.
For the most part, budgets are split across the 12 months to align with actual spending, and you may have some callouts eg if you pay half your marketing out in one month, that month will have a larger amount and the rest will be distributed across the remaining months.
As your organisation changes, you’ll need to understand how this is being reflected in your budget, sense-check your operating model, understand where you are spending your money and whether that is still relevant / required, and most of all - ensure that it all still makes sense to you.
Staying on top of your budget each month is essential, it doesn’t take long and it’s key to coming out on target at the end of the year.
I hope this has helped you realise that it can be really simple and easy for you to get certainty around what the budget process looks like. My final suggestion is - if you don’t understand, ask questions. And keep asking until you are satisfied.
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