Most businesses and many individuals set budgets, but how to set an effective budget?
Setting an effective budget does not begin with any numbers. It begins with the objective. If you don’t know the objective of your business or for that matter yourself then setting an effective budget is impossible.
In my experience people and businesses like to have non-quantifiable objectives such as “to be the best in ….” “to be the biggest in….” “to be the fastest growing in …..” etc. These objectives are the lazy ones because you can always think of a reason why you are the best, biggest or fastest.
Objectives must be SMART
SPECIFIC
MEASURABLE
ACHIEVABLE
RELEVANT
TIME-BOUND
Once you have an objective that complies with all of these then setting an effective budget comes naturally. All you need to do is ask “does this source of income or cost move us toward our objective or not?” If it moves you toward your objective then include it, if not, don’t.
then work out how to fund it.
It’s the same when effectively measuring actuals against budget. You simply ask the same questions. If the income or expense moves you toward your objective then great. If not, eliminate it.
If you want to look at this further we have both manufacturing and service simulations to enable everyone to be more effective then please contact us for details – https://www.wellsassoc.co.uk/contact/
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