Budgets must be prepared by the operating divisions, as they are the ones who will be responsible for implementing the plan. If management tries to manipulate the numbers for their own benefit, the entire process becomes a sham. Any changes to the budget must be sold to the division to ensure buy-in and commitment to the plan.
The Importance of Clear Reporting
Statements comparing budget to actual should be written in plain English to eliminate confusion and promote faster understanding.
The Benefits of Safety Factors
To avoid missing the budget and the resulting barrage of questions from lenders, directors, and owners, it is important to include an arbitrary safety factor in the top statements that go outside the company. This allows for unforeseen setbacks without distorting the figures used to measure trends.
Divisional involvement in budgeting and clear reporting are crucial for success. By following these principles, small companies can thrive and succeed.