How Budgets Are Like Pancakes: A Recipe for Creating Smart Financial Plans Return
What do we know about pancakes? We know they’re flat. Pancakes are so flat they’re our benchmark for flatness. We often use them to describe the flatness of other things. Budgets are like pancakes, too. But not because they’re flat. Rather, budgets are like pancakes since the best way to make a budget is to use FLAPJAC: Facts, Linkages, Assessment, Projections, Judgment, Assignment and Comparison. Properly done, a budget can be an extremely powerful management tool, guiding a team to its objectives. To reach an intended destination, you need an effective budget. To make sure your budget is useful, follow these seven steps:
Facts: The best predictor of future performance is past performance. Gather actual income and expense data from prior periods. Assemble market data from reliable sources.
Linkages: Derive relationships among factual data (growth rates, interdependencies, etc.). Understand drivers or source of all revenues, expenses and asset needs. For example, sales require manpower, and labor expenses are obviously a function of headcount; determine the relationship among these factors to be able to estimate payroll cost based on sales and number of employees.
Assessment: Ask team members to estimate next 12 month’s activity levels for driver data (e.g., sales, headcount, etc.) based on market knowledge and trends discovered in step 1. Set achievable targets that require team to reach high.
Projections: Apply operating assessments for drivers (e.g., headcount) to dependent variables (e.g., payroll expense) and formulate monthly prediction for revenues, expenses and asset purchases. Show net impact on cash and credit, too.
Judgment: Evaluate the reasonableness of the projections. Determine that proven data relationships are intact and that the plan makes sense when viewed as a whole.
Assignment: Allocate responsibility for meeting projections to appropriate team members. Make sure responsible parties have authority in given area.
Comparison: Measure actual results against budget each month. Praise favorable variances. Require responsible team members to address unfavorable variances (>10% of budget) and implement recovery plans. If variance becomes too large (say >35% of budgeted figure), consider recasting.
Companies using this process demonstrate dramatically better financial performance than those who don’t budget properly. If you don't have useful budget in place, let us know, and we’ll help you.
Facts: The best predictor of future performance is past performance. Gather actual income and expense data from prior periods. Assemble market data from reliable sources.
Linkages: Derive relationships among factual data (growth rates, interdependencies, etc.). Understand drivers or source of all revenues, expenses and asset needs. For example, sales require manpower, and labor expenses are obviously a function of headcount; determine the relationship among these factors to be able to estimate payroll cost based on sales and number of employees.
Assessment: Ask team members to estimate next 12 month’s activity levels for driver data (e.g., sales, headcount, etc.) based on market knowledge and trends discovered in step 1. Set achievable targets that require team to reach high.
Projections: Apply operating assessments for drivers (e.g., headcount) to dependent variables (e.g., payroll expense) and formulate monthly prediction for revenues, expenses and asset purchases. Show net impact on cash and credit, too.
Judgment: Evaluate the reasonableness of the projections. Determine that proven data relationships are intact and that the plan makes sense when viewed as a whole.
Assignment: Allocate responsibility for meeting projections to appropriate team members. Make sure responsible parties have authority in given area.
Comparison: Measure actual results against budget each month. Praise favorable variances. Require responsible team members to address unfavorable variances (>10% of budget) and implement recovery plans. If variance becomes too large (say >35% of budgeted figure), consider recasting.
Companies using this process demonstrate dramatically better financial performance than those who don’t budget properly. If you don't have useful budget in place, let us know, and we’ll help you.
