If you are setting the budget for a recently merged business the range of issues may well call for zero-based budgeting. You would not automatically assume you need all the resources of the combined businesses or that the current ways of doing things are right for the new company.
When constructing a cost budget, you should ask the following questions:
- What am I going to get for this item of expenditure?
- What will we actually do with this part of the budget?
- Have we factored in inflation?
- How will this extra expenditure affect clients?
- What percentage of the budget did this account for three years ago?
- Did we spend the total budget for this item last year?
- Why did this part of the budget overrun last year?
- Does this extra expenditure give us a clear increase in productivity?
- Is this line an “investment” or a “cost”?
- If we had to lose 10 per cent of the total, where would it come from?
These are all ways to test the thinking behind the budget, even if you have a one person business. It pays to be inquisitive. Always consider how you would justify an item in the budget being the same as the previous year plus inflation.
David Shelton is a consultant at Stoke Bishop Associates