In the first 2 articles, I covered setting the budget, so in this part I will address communicating and reporting on the budget – the latter being referred to as Variance Analysis. Given there is a lot to say on Variance Analysis, I am going to cover part in this blog and the rest in my final blog on this subject.
Communicating the agreed budget
I am a great believer in an inclusive style of management. Treat your team with respect and involve them – both in the budget setting process if possible and definitely in sharing the budget for the year. After all you are not going to achieve it all on your own. Let them know the budget, the reasons and assumptions behind it and update them how you are going against it. Once more communication is the key.
I always remember a great analogy shared by one of my clients. He talked of a junior basketball team that he helped to manage. He asked us to imagine what would happen if he were to tell the kids that this year he was trying a new approach – he would be covering up the scoreboard at each game – but do not worry, at the end of the season he would tell them how they had done. Most people replied of course they would probably stop turning up to games – and even if they did turn up, they would be demotivated. Of course, I understand this is actually happening at some schools and what do the kids do? They keep their own score!
So let your team know how things are going. Yes, both the good news and the bad news – that is the way to ensure your team trust you. It also enables them to contribute with suggestions as to what they can do to take corrective action. I was once asked by the senior management of a company to gather feedback from their employees since they knew that morale was low. I ran a number of focus groups and what I uncovered was a total distrust of the senior management team. Why? Well one reason given was that the previous year, the senior management had lead them all to believe that everything was fine and then suddenly 50 people were made redundant – representing something like 25% of the workforce. The truth was that the company had been struggling financially but the employees were kept in the dark about this. The redundancies came as such a shock not only to those let go but to those remaining. A year on and these staff, who remained, did not know if there would be more redundancies, felt insecure and did not trust the management team. We all know that a climate of low morale and distrust is not a productive one. It is always hard to share bad news, but share what information you can with your team and enable them to contribute.
A variance is simply a difference between your budget and the actual figures. Of course, you will have variances both good and bad – favourable and unfavourable – unless you have that crystal ball!
So, let’s say you are asked by your manager to report on these variances, how do you go about this? Well remember I said earlier that if you were asked to set the budget, it was because you were seen as the person who knew most about the area. Remember the Finance area are great at producing the financial reports but they do not know what is actually happening in your area. They do not know whether the financial reports bear any resemblance to this. That is where you come in. If you are being asked to review these financial reports, you should ensure they reflect what you know has been happening. I always think the best test of whether a manager is in control of their financials, is to ask them to predict the actuals for the month before they receive the report from the Finance area. Could you do this? It might be a good challenge! I also guarantee if you do this and query the numbers if they do not tie up with what you predicted, it will enhance your financial understanding and hopefully boost your confidence. It will also demonstrate to your colleagues in Finance that you are doing a great job in managing your area – who knows you might even impress your manager - better than not having the answers when questioned...
Where to Start?
Now in reviewing the figures, do you start with Year to Date (YTD) or the month? Both give us valuable information. The former is vital to provide information on how the year is shaping up e.g. Do you look like making budget? Also have small incremental adverse monthly variances accumulated to be significant? I serve as a non - executive director in a voluntary capacity of a sporting association and in this role, I usually start with the YTD since my first concern is how our organisation is travelling in relation to the budget for the year. I will look at the monthly result as well but after I have reviewed the YTD numbers, to see if there are any looming problem areas. Of course, if this is some way into the financial year, you may be aware of problems that have occurred in prior months and will be keen to see if the corrective action is having the desired impact. In providing an explanation do remember that the reader of this report is looking for the reasons behind the variance. I have read commentaries which read “Stationery was higher than expected this month” – that is not helpful – I can see that myself from the numbers! Why was the stationery cost higher? Is it a one off for this month? This is where identifying what type of variance it is can be helpful. I will cover that in the final part.
I hope this proves helpful in assisting you with the budgeting process. I would love to hear your views.