Company financial budget is the core part of company management. It is usually said that a good financial budget is half of the company's financial indicators. However, the formulation of financial budget is a very professional matter. This article lists some basic methods. For reference
Some companies make budgets from the bottom up, and the boss lets the managers and employees of each department make their own plans for next year. The idea behind this is: If employees figure out their tasks for the next year, this goal should be achievable. The boss doesn’t have to pat himself on the head. Some companies make budgets from top to bottom. The boss sets high goals based on his own understanding of the market and customers, and more based on his own subjective wishes. What employees are asked to do is not to discuss whether the goal can be achieved. But how to achieve this goal. Usually, although employees do not recognize the goals set by their bosses, out of respect for their bosses, they passively accept the goals even if they cannot achieve them.
The same result of these two approaches is that the company loses its due growth opportunities.
The problem with the first approach is obvious. Usually employees and department managers look at the future from the past, without considering that the future should be fundamentally different from the past. Their logic is usually: I have 100 customers this year, add 20 more customers next year, minus the 10 customers I will lose next year, and my 10% growth is determined. They rarely consider more but more fundamental variables and conditions, such as what will happen if a new product comes out? What will happen if the manpower is increased by 30%? What will happen if the sales model is changed? What will happen if the product price is increased? What will happen if the sales channels are increased? What about adding offices? What about reclassifying clients? Growth in other ways, usually outside of their experience.
But calculating the future based on past practices is definitely a conservative and wrong goal. The real future lies in changing the practices of the past. The "zero-base budgeting" question I had to answer in the interview was about this problem. Zero baseline means that when making a budget, we do not simply map past numbers to the future, but overthrow everything in the past and start from scratch and ask ourselves, if there are such or such conditions (products, manpower, models, etc.), what can we do? What goal is achieved?
The problem with the second approach is not obvious. The logic of many bosses is: I know it is unrealistic to ask for 100% growth, but if I ask for 100% and finally achieve 50%, it is much better than the 20% proposed by employees. But the fact is that not only does the boss not get the 50% growth he wants, but he also doesn't even get the 20% he could have achieved. I have found this to be true with many clients for many years.
Bosses who do this ignore the most important part of the budget process, which is to make everyone involved in the budget believe in the budget and understand the logic behind the budget. No one agrees with the budget made by the boss, so no one will seriously implement it. The so-called goal is not a goal, but a joke. Usually even the boss does not believe in such a goal, and he will not allocate corresponding resources according to this goal, such as increasing manpower or other investments. Without investment, budget targets simply cannot be achieved.
A good budget requires the company to complete several cycles from top to bottom and from bottom to top. Behind the reincarnation is a serious discussion about the future of the company. Not only is the boss’s opinion important, but so is the employee’s opinion. During this discussion and even debate, the boss’s subjective ideas were revised, and the limitations of the employees were broken by the boss’s forward thinking. The final result was a feasible budget that was also accepted by everyone to the greatest extent possible. Only if it is feasible and recognized by everyone can such a goal be achieved.
Wu Zi, a master of military art who is almost as famous as Sun Tzu, said: "The victorious soldier wins first and then goes to war." The budget process is actually a process of winning and then fighting. Management is all about winning and then fighting.