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Sprout Business Talk

Sprout Business Talk

Author: Kevin Watson
Date: 2014-05-16
When running a business it's important to know where you're going (strategy) and to measure the success against a budget. Budgeting allows a company to plan for things e.g. the purchase of new machinery.

A starting point is using the business's performance in the current financial year. This is sometimes referred to as a "Top Down" budget as management takes last year, adds a percentage and tells staff to achieve it. Another method is the "Bottom Up" budget whereby everything is looked at fresh each year. Staff give input on what is achievable and feel part of the process. Management typically add a bit of stretch in the budget and all sign off with incentives usually tied to achieving it.

A budget is used to plan, as mentioned above, but targets for staff can exceed what is in the budget i.e. targets and budgets could and should be different.

It's great to put a budget in place to act as an early warning system. It's not good enough though to just know there is a difference, one needs to act on it. If it doesn't look like targets are going to be met, one might decide to lease rather than buy the new machinery.