Budget setting – art or science?

This is my second attempt at writing this article. The first effort started off as a worthy piece about how the numbers and strategy needed to work together. By the fourth paragraph though I’d bored myself and I figured it would have done the same to anyone reading it even earlier.

This is odd as the budget is probably the most important document an Agency FD can produce but writing about it in a theoretical way seemed like preaching to the choir, worthy and all, but isn’t going to change any minds.

What I settled on as being hopefully more interesting is some do’s and don’ts drawn from my years of getting budgets wrong. This is no false modesty, every budget that everyone has ever set has been wrong from the moment the paper cooled from the printer. Budgets are not about getting a right or wrong number they are about the direction of travel. What repeat business do you expect? What is a sensible new business target? How much can you afford to spend on training versus marketing versus anything else you’d like.

It’s important to say here that this is about budget setting for independents. For group companies save time and frustration by asking Head Office what number they would like.

Assuming that you do have control over the budget process what are some of the obvious mistakes to avoid in order to make the budget if not correct then relevant for a little bit longer?

The most obvious mistake to avoid is to be very careful of a client budget which increases dramatically year on year, especially if a relaunch is mentioned. I’m not saying it’s not going to happen but it’s a warning flag – dig a little deeper, ask whether the overall budget including TV, direct, digital has been signed off. It’s very tempting to grab hold of this offering from the Account Director as it will go a long way to helping set an increased target. We all like a higher target but do your due diligence first. I’ll not make that mistake again.

The next obvious mistake is to avoid setting an unrealistic new business target. It’s tempting to add a little extra new business to support a target. Don’t set a new business target out of kilter with last year’s achievement. Even if the year before was a really good one for new business that was over a year ago, new business tends to be a form game with streaks of success or failure. It’s not sensible to forecast a radical change in luck/chemistry or whatever it is that affects pitch success.

I’ve struggled with forecasting freelancers too. It’s tempting to believe next year you will need fewer freelancers than this year. You can identify resource shortages and invest in new people but the odds are freelancers will remain stubbornly high. This is mainly down to the fact that these resource problems and potential solutions are constant and unless you are doing something radically different as a business, business as usual will apply. The same principle applies to recruitment as well. If your churn rate was 20% last year is it sensible to budget for a lower rate this year?

Another danger I try to avoid is either being too uniformly optimistic or pessimistic. There are always going to be potential upsides in client spends just as there are risks to forecasts. I like to look at revenue budgets with the possible upsides and downsides all together. That way I can make sure I’m not including all the additional revenue and assuming we won’t lose any business. Or vice versa. Life is not like that.

There is one difficult judgment that has to be made when there is a re-pitch for an existing client. If the result is not going to be known until well into the new financial year what do you do? I’ve faced this a number of times and the conclusion I’ve come to is that the odds on retaining the business are not good enough to encourage me to live with the results for the next year. I would assume you’re going to lose the client or prepare two versions, one for each outcome. One final idea on the revenue side is that whilst we usually forecast new business how often do we include a revenue attrition figure?

So, try not to get carried away with potential good news, be realistic about new business and freelancers, balance risks and think about an attrition rate and take the hard call to omit any clients which are re-pitching. Even if you take these steps your budget won’t survive the first contact with reality but it will be based on what has happended and will point in the right direction.

Despite the hard choices and the inevitable inaccuracies I’m a huge, huge fan of budgets. I do love doing them.  They are neither art nor science but it is a chance for the FD to have a real impact on the plans of their Agency. It is the platform to make choices about resource, costs, investments, operations. The more planning, the more analysis you do the more useful the budget will be.

The author, Simon Collard, has set budgets for marketing service Agencies for nearly 20 years. Despite never getting one entirely right his optimism remains undimmed. If you need help putting together your budgets and reforecasts please email me on