Why budgets and plans go hand in hand

Every business organisation needs to a detailed financial plan or budget for the effective control of financial resources in order to operate efficiently. While financial controllers are responsible for the management of financial resources, commercial managers have the responsibility of producing the profitable income on which the organisation depends. Planning how that income is to be produced is fundamental to deciding what financial resources will be necessary for its production, and what returns will be generated as a result.

Although budgets and plans should be prepared from the bottom up rather than imposed from the top down, for the commercial manager, it starts with a financial objective, which is derived from the corporate plan. The corporate plan will set out the income and profit objectives, together with a corporate budget that will outline the uses of financial resources and investment.

The commercial manager has the responsibility of preparing and executing a commercial plan for the achievement of the financial objective. While corporate plans are usually set to cover for a period of three to five years, with perhaps an annual progress review, commercial plans are normally considered to be short term, usually for twelve months.

The purpose of every business is to make money, by anticipating and satisfying customer requirements profitably, for the benefit of its owners and for the employees on whom the operation depends. The commercial manager’s responsibility is to produce the profitable income on which the business survives. A commercial plan, is therefore a necessary tool for the effective management of resources to achieve the objectives, and against which performance may be continually compared.

Preparing a commercial plan, requires input from all those different activities involved in producing profitable income from customers, so that as far as possible the plan should be  prepared and written by those who have to execute it. That way, having been given an objective by the commercial manager, they have the responsibility and ownership of the pathway to achievement.

Ideally, a commercial manager would be given a financial objective, and would then prepare a plan and propose a budget for its achievement. This would then be submitted to the senior management for acceptance and funds allocated accordingly. In practice, it is more often the case that the financial controller, on behalf of the senior management hands down a “Departmental budget” to the commercial manager, which is simply an allocation of money for the commercial operation, This allocation may have little to do with the actual commercial situation, but the commercial manager has to make a workable plan within the financial limits.

The financial target of the commercial plan needs to be clearly stated and understood by everyone involved in the plan’s production. While targets for product sales, market share and other market related objectives are important, it should be remembered that income comes from customers, thus the target customer base must be clearly defined, as well as the strategies to be employed to engage the customers.

A commercial plan should ideally contain the following elements:

• A clear statement of the financial objectives.
• A statement of  the commercial objectives in terms of product, market, promotion and price,
• A description of the markets over the 12 months of the plan, with an appreciation of the economic and other trends.
•  A statement of the commercial policies to be followed over the period, e.g. the markets to be engaged and the methods of engagement.
• A list of principle contracts to be achieved over the period on which the greater part of the income plan depends.
• An appreciation of the critical internal factors that could adversely effect the commercial achievement of the next 12 months
• An  Action Plan listing what commercial  actions have to be taken , by whom and when.
• Sales/Revenue forecast prepared as a Profit and Loss account by month.
• Commercial Budget    comprising an  estimated schedule of commercial expenditure for the period, including travel vehicles, living expenditure, advertising, P.R., exhibitions, entertainment etc. N.B Having got to this stage in the planning, if the estimated budget required for the plan exceeds that of the Departmental allocation, the commercial manager will either have to revise the plan within the allocation, or use the plan to request additional resource from senior management.

Commercial managers need to ensure that the assumptions on which the plan is based are clearly understood as are the adverse external risks. If anything can go wrong it will. Therefore there should always be a contingency plan and fund to deal with unexpected circumstances.