Managing a Department Budget- why non-financial managers need to look at the figures

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Financial Knowledge is a must for all Departmental Managers!

Spreadsheets, budgets and Profits & Losses are for management, accountants and finance departments. As  non-financial managers, you need to focus on your team and deliverables, and let the experts worry about the numbers.  Unfortunately, this couldn’t be further from the truth.

Profit margins are shrinking and companies have to find innovative ways to stay afloat. This makes budgets and profit and loss everybody’s problem – including yours!

Knowing basic accounting is no longer a ‘nice to have’ asset – it’s a must have.  The ability to run your team within a budget and being able to justify your spend, will actually determine your team’s survival in the long term.  So what does knowing basic accounting look like?

The first thing to do is get an understanding of the key figures that are important to your business and stakeholders. Obviously it’s profit – but what specifically? What are top line and bottom line costs that the company is monitoring?

  1. There are three main financial statements that you need to know and worry about – Balance Sheet, Profit and Loss (income) and Cash Flow. These three documents will give you an overall understanding of where the company is at and how it is performing. These numbers will also help you determine how your team can add value to the organisation.
  2. Managing a team means decision making, and this involves data and analytics. In order to make informed decisions you need numbers. These numbers should ideally include budgets as well. Any action you have taken needs to have a cost benefit analysis attached to it.

Let’s take a real life scenario. As a department head you are probably required to submit annual strategic plans and bi–annual reviews.

If you are in the process of developing your department’s strategic plan, then apart from annual business goals or KPIs you will need the following, if you want the plan to be approved:-

Revenue Projections – with projected growth that is based on the annual business goals and team KPIs.

  • Fixed Cost – employee salaries, infrastructure costs, etc. Basically recurring cost that you incur every month to keep the lights on.
  • Variable Cost – campaign management cost, over time pay, and other costs that need to be budgeted in during various times of the year.

Once you have all these details in place, you will need to play devil’s advocate with your budget. What are your department deliverables? What are the goals? What services do you offer to the organisation?

Play out a couple of ‘what if’ scenarios so that when the board queries your numbers, you have the data and analytics to back it up. A famous question that CEO’s like to ask managers of sales teams is – “If I double your budget can you double your sales projections?”

If a similar question were posed to you, what would your answer be? Once you have the analytics to back up your department budget, then it’s a matter of priorities.

What is a ‘must have’ expenditure and what is a ‘nice to have’?

Know you are almost ready. The next step is to use a simple budgeting tool (such as Excel) to present your projections, numbers and goals in a friendly manner – via charts and graphs.

Of course it is important to note that plans are not iron clad. Your budget will, from time to time, have variances. But planning will ensure that these variances are kept to a minimum within your department, and even when they do occur, they do not adversely affect the bottom line of the company.

In case you still aren’t convinced on the importance of budgeting practices as a non – financial manager; let’s look at an example close to home. Stevi Lowmass, the Founder of The Camel Soap Factory, started just six years ago from the shed of her Dubai villa.  A first time entrepreneur and previously General Manager of a software company, Stevi quickly learnt the challenges of a owning a SME – especially cost vs. benefit.

This is just one example, budgeting can come in handy in any situation, even in personal financial management.

If you would like some in depth knowledge, join us at ISM for the Finance for Non Financial Managers workshop. Register today!

In every business the underlying decision is usually financially based.There is also ever increasing emphasis placed on stricter budgetary control leading to increased competition between functions for a share of limited resources. Even relatively small investments require some element of business justification and decisions to spend money must increasingly be justified by the manager involved. Functional or technical justification is not enough nor the alignment of needs with a solution.
Many decisions stall because the budget or approval cannot be secured.
The main reason – the business rationale or justification for the purchase is not sufficiently clear or compelling. It is essential, therefore, that important business decisions such as these are based on a sound, easily understood business case.

decisions

You need to make the right business decision

A business case is a decision support and planning tool that forecasts likely financial results and other business consequences. The case has to be made by using evidence and reasoning to support a conclusion and must connect the evidence to the conclusion with a compelling rationale. The case has to demonstrate how the evidence was obtained and that it is reliable.

If you want to get approval or decide between alternative actions more than a few cash flow figures are required. Nevertheless well-known financial methods are central to a good business case; however, they are not the central problem in developing the case. Ideally, a business case includes a financial model with a cash flow statement showing estimated costs and benefits for one or more scenarios. It is also important to be able to show business impacts that cannot necessarily be expressed in financial terms.

You need to connect evidence, business impact and estimates to a conclusion e.g., “A projected net gain of $500. 00”. The supporting rationale needs to demonstrate the projections clearly, together with the methods and assumptions used. Having said that numbers alone do not make a business case.

A good business case has a structure which has:
• An executive summary.
• Cash Flow projections in a timeline.
• Identified assumptions and methods for determining benefits and costs including those that are non-financial.
• Identifiable critical success factors.
• An assessment and measure of sensitivity and risk.

The data and models of the business case need to bring together all of the information that is latent to the proposal. The case has to be centred by way of a dynamic financial model, which will serve as the basis for the sensitivity and risk analyses, as well as providing data for preparing and packaging a business case report.

Powerful and persuasive business case skills can be learnt and put into practice in all areas of the business including project management, product management, sales/account management, finance management and strategic planning. These skills will benefit the organisation and individuals by providing them with more confidence and greater understanding of financial performance, which will result in more profit and the better use of resources.

In order to achieve this, the case writer works as a liaison with stakeholders to obtain, analyse, communicate and validate requirements for changes to business processes, policies and information systems. Therefore, the case writer has to understand business problems and opportunities in the context of the requirements and be able to recommend solutions.

Professional training is essential if an organisation is to be able to generate better understanding of the options, impacts, sensitivity and risks of critical decisions.

This post is attributed to Bill Levell, one of the leading UK Finance, Sales and Marketing Instructors who is the Director of Courses for ISM Training in Dubai.

How you handle the budget for your department can make a huge impact on the fortunes of the entire business. So why do so many companies fail to properly equip department managers? It’s a problem that stretching from Dubai to Rio de Janeiro, and here’s the main culprits.

Fear

Without proper training managers often fall into the trap of being too scared to make the decisions necessary to keep their departments on track. The fear takes over.

The best way to overcome the fear is through training. While someone may have the best skills to do their job in their sector, without the financial know-how they could turn into a massive drain on company finances.

Lack of an overall plan

Putting your everyday decisions into the context of the company finances can seem like wading through wet sand. How do the actions of one department impact another? Are there points where departments overlap?

To get around this issue requires the financial director meeting up with each department manager at least twice a year. By working with the financial director, each non-financial manager can see how their departments should be working in harmony with the whole company.

Inability to understand financial jargon

Trying to interpret a whole new set of terms can be daunting. For many the jargon itself is off-putting. Imagine you’d never heard of financial statements, overheads, working capital, profit margin, ROCE, ROI, COGS, balance sheet, cashflow, gross profits, to name just a few. Faced with a wall of unfamiliar terms can make people feel insecure and is a massive stumbling block to keeping their department’s finances in check.

It may appear cheaper to tell those fumbling around with the new terms to read a book. However, the most efficient way to help managers is to put them on a course. They can work alongside someone knowledgeable, whose job is purely to train them and their progress can be monitored.

Poor budgeting skills

Some people just don’t get a budget. They unconsciously believe that whatever they need will magically appear from the bottomless pit of company cash reserves. This attitude can come from a lack of knowledge of the business, which can be addressed by involving managers in high level discussion about where the company is heading and how much money is available to achieve the goals. More seriously is the manager who simply doesn’t understand budgets on a more basic level. Training is the key to addressing this fundamental lack in business skills.

Defending your corner

boxing

It doesn't need to come to blows if every understands financial jargon and can speak the same language !

Sometimes departments can go to war over the way the budget is portioned out. The result can be a very defensive mentality that can damage the company’s financial health.

This can be a deep-rooted, long lived battle that requires careful intervention by directors. Getting everyone around the table to discuss the causes of the conflict may be difficult and emotions can run high. However, to keep the business on track, it’s necessary. In some instances bringing in a business coach can be highly effective. By having a third party, with no affiliations to the company, brings a fresh perspective and can have a profound impact on the negative dynamics that have built up within the company.

For more information on training your non-financial managers in Dubai, please visit the ISM website: https://www.ismdubai.com. We run finance courses regularly and can tailor in-house training sessions to your company’s particular needs.