Costs will rise when you are not looking - make sure you're prepared to manage your budget effectively
If there is one truism in business, it is that costs will rise when you are not looking. It always seems silly not to invest just that little bit in a new proposal, to allow just that little bit of extra spend on a project – and often this is the right thing to do. Since this always happens, costs always rise. Monitoring a budget will not prevent this sort of thing happening, but it will at least identify that it is happening – and where it is happening. This gives you the opportunity to either resist extra spend or find places where you can reduce spend to fund new ideas.
Remember a good Return on Investment (ROI) is fine, but only if you have the cash flow for the ‘R’. Remember also that the R is something that those who allocate the money have to understand.
1. Know the planned spend, and monitor it at least monthly
Management accounting is not bureaucracy. Understanding the management accounts gives you the data with which to monitor costs. If it is a bit of a closed book to you, then go and talk to your friends in finance. It is an odd financial bod who won’t take delight in explaining things to you. How often does he or she get asked?
2. Understand the elements of your management accounts
All too often, management accounting can be wrapped in jargon or presented in ways that seem obscure. Analyse the accounts. Make sure your management accounts tell a story. If they don’t – and especially if there are bits that don’t make sense – investigate with finance colleagues.
3. Make sure your whole team knows that the budget matters
There is a big difference between ‘of course’ knowledge and ‘practising’ knowledge. Practising knowledge means that people act on it rather than treat it as some theoretical point. Ensure your people see the figures each month. Discuss the figures with them. Invite questions and ideas.
4. Make a rule – no extra spend unless four out of five below are true
• the ROI makes sense
• the cash is available
• the cash flow can stand it
• you can find savings elsewhere
• you are given extra budget
5. Do be serious about investigating extra spend
It is so much easier to prevent unnecessary spend than it is to correct errors later. This is especially true of recruitment. Making a poor recruitment decision is really expensive. It is almost always better not to hire than to hire the wrong person.
6. Look for the little costs as well as the big ones
Without asking you to count the paper clips, be aware that management accounts can be misleading. Often there will be two or three big ticket items that you are tempted to focus on – and often rightly so. However, the little items can add up, too.
7. Don’t go crazy
Remember that some spend is aimed at staff morale. Cutting out coffee during morning meetings may save a bit of money but it may rebound on you. Managing a budget is not the same as cost cutting per se, it is a matter of making the available money work as hard as possible.
8. Recognise that finance has a political side
Odd? Yes, but true. Departments compete for budget. Decisions on budgets and investments cannot be made with perfect knowledge of the facts. Across a company, there are too many facts to handle and, anyway, the future is uncertain. Thus, budget decisions always have an interpersonal, and therefore political, side. He or she who is most persuasive will be first in the queue for budgetary handouts.
9. Tell the whole story with hard and soft data
Persuasiveness is often a matter of the difference between hard and soft data. Hard data shows not only costs but financial returns (or pretends to). Soft data has difficulty with showing actual numbers for the ‘R’ of ROI. It does not mean that soft data is any less real but, given point six, it does mean it will often be pushed to the back of the queue. Find ways of making your data hard.
10. Accept that waste happens
You seek to avoid it, but waste is a fact of life. It would be great if every new idea produced a wonderful benefit. However, if you reject every idea just in case it won’t produce the benefit, you will stop all new ideas – and fail as a manager. Many companies actually set aside budgets for creative thinking. If it pays off, it often pays off big.
This article is part of the Learning Academy, an online management learning website, provided by the Working Manager.
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