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Budgeting on more conservative budgets

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Budgets are a vital part of the business planning process, since they allow organisations to measure themselves against their previous years' performance and set themselves financial goals to achieve against – something that's considered to be critical to success in today's less than perfect market climate, writes Anton Herbst, MD of ACT.

Basing one's budget on historic performance is not always the best route to follow however. With the market in such a state of disarray, even the most astute of market observers would find it difficult to predict with any measure of accuracy, what the coming months hold.
More than ever before, we as an industry can't count on any ad-hoc revenues, since it's not clear where these will come from. We furthermore, also don't know what kinds of discretionary spend we will have to endure over the coming year.
So, that's the reason the budgeting process should entail us wiping the slate clean and focusing on things that we know, or at least believe we know fairly well.
We should also take our lead from what larger (and in many cases much more astute) companies in the market are doing, like for example, following the lead of the top performing listed organisations in South Africa.
If you take a close look at what these businesses are telling their investors, it's clear that very little growth, if any is due to take place this year.
And my question is, is that such a bad thing?
As an investor, I would much rather have a realistic and conservative set of predictions to look forward to than an extremely positive, but unrealistic set of predictions that, let's face it, the company is sure to fail at achieving.
With a more realistic and conservative approach, one also tends to look at every cent of the spending carefully and relentlessly manage costs (and it's important to note, not just cutting them for the sake of doing so).
It's also important to note that it's wiser, at least at the moment, for companies to wipe their budget slate clean and look at what the actual costs for the coming year are likely to be, as opposed to once again, going on historical data.
That's because historic budgets, and more specifically ones that centres on cost are based on the good times that ensued in previous years. And you can't be sure whether that spend in previous years was justified or simply driven by the mood in the market at the time.
If one wipes the slate clean, however, you're forced to look at the actual costs in the business and ensuring that the costs you're budgeting for are in-line with what the market conditions warrant.
It also forces companies to consider things they can do to derive increased business value, while incurring less capital or operational expenditure, like outsourcing non-core aspects of the business to third parties that are far more shrewd at that task, or finding more effective ways of marketing and communicating with customers, like for example employing social media.
It's not a given that your costs will shrink if you follow this road – one can however count on them being more realistic and in line with what the market warrants.
When it comes to revenues, companies need to sell harder – and set ambitious, but at the same time achievable targets and goals for staff.
Because things are more uncertain than ever – these practices also need to be revisited regularly. As things unfold, you need to be able to adapt your budgets and bring your business in line with what it needs to do in order to survive.
More than anything, it should be clear that a budget is not something you set at the beginning of the year and look back on at the end of the year, scoring yourself on how accurate your predictions were.
It's a living document and something that you should revisit and update, at least monthly – tracking your costs and revenues closely to see shortfalls or progress made.