Follow these four steps to build a dynamic budget:
1. Get a vision.
You and your team must clearly know where you want to go before you can have any hope of ever getting there and so you can know when you do get there. As the leader, you likely have the clearest picture of where you want your organization to be in the future. If not, work with your key players to clarify where you want to go. Even if you do have clarity as the leader, still get feedback from some of your people so they will own the vision as well and be on board to make it happen.
2. Be a student.
The word “discipline” comes from the Latin word for student or learner. You can be a problem-solving learner when creating your budget by first looking at your organization’s financial history. Look at your operating statements from last year, then increase all categories by a percent of anticipated growth for the next year. If you have multiple years of operating statements, determine your percent increase from each year and apply that percentage. Look also at what similar organizations spend on people, programs, buildings, etc. Rather than the dollar amounts, notice the percentages they spend so you can use those same percentages as your guide.
3. Set SMART goals for your income and expenses.
Specific. Measurable. Action-oriented. Realistic. Tied to a date. Set SMART goals for your income and expenses even though you know your projections won’t be accurate. They still will serve as a guide to getting you where you want to go. Take the information you gleaned in the research stage and use those percentages to set your SMART goals. Keep in mind the budget percentages you saw for key categories and adjust them in your budget as needed. A good dynamic budget establishes benchmarks based on percentages. Keep the budget categories as few and as simple as possible. Budgets can easily become overwhelming and unhelpful for decision-making if they are too detailed. You can always dig into the specific categories if you need to.
4. Measure and adjust.
Your financial statements reported against a budget give you the essential feedback you need to determine whether you are allocating your scarce and precious resources as well as you can. Adjusting your budget based on actual conditions is what sets apart dynamic budgeting from (unrealistic and unhelpful) static budgeting. Budgets can and should be adjusted for the problems and opportunities you encounter along the way. Let no financial person tell you that something can’t be done or resources can’t be spent simply because it is “not in the budget.” The budget can be adjusted when it makes sense to do so to achieve goals.
By creating a dynamic budget, you are putting in place a critical tool that significantly improves the likelihood of your organization achieving the goals you have set.