Budgeting 101 for First Time Managers
Now that you’ve been promoted to your first managerial role, one of your many responsibilities will be to manage your department’s budget and spending. It is quite possible that this will be your first time you will have to prepare a budget. We’ve all done budgets in our personal lives but is the budget for your department that much different? Yes and no. Let’s examine what it involves.
What is a budget?
Budget is a financial plan and a list of all planned expenses and revenues.
The budget typically consists of four major pieces:
- Budget for People
- Budget for Operating Expenses
- Budget for Capital Expenses
- Budget for Revenue
Budgeting for People means reviewing current staffing in your department, the skills they exist and looking to the future for what you would like to accomplish as a department and what will be needed. You can then determine if the current staffing levels are ok and/or if you need to hire additional staff with different skills.
Budgeting for Operating Expenses means predicting how much money you will need for the day-to-day operations of your department. Things like salaries, overtime, supplies, software licenses, travel expense, training, conferences, etc.
Budgeting for Capital Expenses relates to costs associated with purchase of computers, equipment, furniture, etc., generally items that last for more than a year and is usually more than $1,000.
Budgeting for Revenue is typically non-existent if you run a support department such as IT, HR, Finance & Accounting, etc. These departments provide support and typically don’t generate revenue.
Why do I need a budget?
Budget is the best tool to see how your department is doing financially. As someone once said “If you fail to plan, you plan to fail.”
Budget is often seen as burdensome and time consuming exercise but it is a crucial element of financial management and is a huge contributor to your Firm’s overall success. The time spent on the planning and budgeting is a time well spent!
How do you go about building your budget? Who should to speak to? Where do you get the tips & tricks?
The best person to speak to would be your predecessor who prepared the budget, what was the rationale behind some of the numbers and ask for any tips. However, that may not always be possible. Nonetheless, you should look at your department last year’s and the current year’s budgets and any notes or assumptions that your predecessor may have included.
The second best person to talk to would be your boss. He/she will have some views as to how the budget should be done, what should and should not be included and can provide some guidance. He/she can also tell you what the overall goals of the Firm is and how your department fits in and how it can support the big picture.
The third best person to talk to would be the finance person (typically either the CFO or the Director of Finance) responsible for coordinating all budgets. He/she can help you understand some of the rules, clarify some of the deadlines and answer any budgeting questions you may have. Please remember – there are no ‘stupid’ questions! It is your first budget you are preparing, you are allowed to ask many questions!
You should also speak to your team. As a new Manager, you may want to find out what’s on their ‘wish list’ or what they really need. You can then incorporate that into your budget. By involving your team and helping them understand the budgeting process creates a sense of shared ownership and encourages your staff to find creative ways to manage expenses.
As you start building your budget, you may be faced with difficult decisions as you will be working with other people’s priorities and you are always going to want to do as much as possible with what you have. Evaluate different directions, communicate with other department leads and determine which course of action will work best.
It is also a good idea to build two or three different ‘what if’ scenarios. Life is never black or white. Presenting alternate scenarios before situations occur will prove you have forethought and are a true leader!
Also, keep in mind that just because you created a budget for the year, it can change if revenue of the Firm are below target. You might have the budget to hire a new employee but it can be eliminated if revenue does not improve, thus a hiring freeze. You might also have an employee who quits and you cannot replace them, which is known as attrition. You will during your managerial career have to deal with ways of cutting costs, including layoffs. On the other hand you might be able to increase your previously budgeted staff if revenue are better than expected.
Should I be tracking my department’s monthly spending?
Absolutely!!! You need to understand what expenses flow through your department on monthly basis. This will help you tremendously when you are ready to start preparing your budget.
Make sure you review your spending regularly throughout the year. Make certain that you are staying within the budget and adjust your spending accordingly. This helps ensure that you are able to make necessary changes before you get into trouble or have to cut people or equipment from your department.
What tools can I use?
The best (and the easiest) tool is Excel. You can set up a tracking spreadsheet that will help you track each account by month, details within each general ledger account, keep historical information, etc. You can then use that information to prepare your budget as you will start seeing patterns in your department’s spending. There are expenses that occur every month with a predictable amount (such as printing charges) and there are seasonal expenses that only happen during a specific time of year (such as overtime expenses during the year-end close). These patterns will then help you create a more accurate budget.
To help you start tracking your monthly expense, you can view the spreadsheet attached below to give you an idea how tracking spreadsheet may look like. In this example, you will see expenses listed by the general ledger category and tracked by month for the current year. The spreadsheet also has the columns for budget by month where you can easily see the expense patterns for the current year and start building your next year’s budget.
As you track these expense, you may also find out that your Accounting department may have incorrectly recorded some of your expenses (either post the expenses to a wrong general ledger account or post expenses of another department to your department). If you don’t review your department’s spending, you’ll never be able find these error and have them corrected.
Are there any courses I can take?
There are courses some universities provide as part of their business schools, typically anywhere from a half-day course to a three-day course. There is also a wealth of information you can find on the internet. And most of all, there is information on the ILTA site under the Resource section where you can find prior webinars, blogs, recordings and discussion.
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