If you’re like many entrepreneurs and business owners I talk to, you probably ask yourself, “what’s all this fuss about a budget? I know what’s going on with my business.” While that may be the case at this particular moment, what about the plan that is in your head for what you want to achieve this year? Do you know what level of profit is possible for the sales that you envision? How much cash is required?
There are so many questions that can be answered by the budget process and a good budget model, including the ones above. Bottom line – a budget is a vital tool for your company’s success.
Quantifies Business Goals. To be sure, a budget is NOT a crystal ball; however, it can serve as a place to consolidate and quantify all of your planning ideas so that you can see the financial impact of all of those thoughts before you act on them. If you have a strategic plan (you do, don’t you?), you should review the tactical items that need to be implemented in Year 1 – this year. These tactical items (goals) will need to be achieved during the year in order for you to make progress against your strategic plan. Quantifying goals is fairly straightforward – list the goal, calculate the revenue it will generate (along with when it will happen), estimate the cost associated with it (additional employees, marketing expense, etc) and add it to your current base of business. Once your goals are quantified, they can be broken down into smaller pieces (departmental sales and expense budgets) to be shared with managers and staff. That way everyone will be able to make a contribution toward achieving the overall goal. Your job will be to motivate everyone along the way to achieve the overall company goal and to put in place processes that ensure accountability.
Serves as a Roadmap. Not many folks use roadmaps anymore – you know, the kind that you have problems folding back up into that neat little packet? Now we rely mainly on GPS to get us where we want to go. Whichever you prefer, both provide you with the path to get from Point A to Point B. Similarly, a budget will serve as your financial roadmap for the year, with your annual business goals embedded in the details. Discipline, however, is required to ensure that the overall goal is fully achieved. And because you can’t foresee all possible risks and opportunities for the coming year as you build your budget, you are starting with a platform from which you can evaluate future events. What good is your roadmap if distances aren’t indicated? You can’t answer the question, “Are we there yet?” You need to be able to regularly assess your progress toward your goal. “You can’t change what you don’t measure” – this sums up the importance of a budget and regular measurement. Measurement of progress against the budget is the ultimate test of discipline!
Mitigates Risk. As a result of your preparation, ongoing measurement and discipline to your budget, you should be making fewer READY-FIRE-AIM decisions for your business. These are the unplanned, spontaneous decisions (think impulse buying) that tempt you throughout the year. Some of these decisions have high risk-high reward profiles, but were never contemplated for budget purposes. These opportunities may be fabulously profitable and seem like they should have been budgeted. To that I say, “No worries!” You just need to drop back (before you pull the trigger on your decision), put pencil to paper (or use Excel), and calculate the cost and benefits of your opportunity – this is called decision modeling. It is far better to make a mistake on paper than it is to implement a bad, and many times, costly decision.
Enables Faster Decision Making. It should go without saying that if you have the financial impact of your 2016 goals quantified, any decisions that you will contemplate over the course of the year will be much easier to evaluate. The reason – you have put much thought into your budget, and any opportunities that come along will utilize the budget as a basis for the decision. For example, say an opportunity to launch a new service presents itself in August. You will be able to determine if your business is achieving its goals (how is your performance to-date against budget?) and if so, understand how the opportunity (revenue, expenses and cash) fits into your plan. To be sure, there will be a separate analysis performed on the viability of the opportunity (does it fit/expand your customer base, what is the competitive landscape for this service, will it grow or cannibalize current sales, etc.). However, you will be much more prepared to make a decision given the wealth of information available from your budget process.
Anyone can pull together pieces of a budget. Most owners feel pretty comfortable estimating their sales and know what big plans they have for the new year. And while those are two major components of a budget, there are many more details that must be weighed and considered as part of the process. Assumptions, historical trends, economic climate, customer preferences, vendor relations, competitive environment, pricing, wages, taxes, benefits, staffing, utilities, travel – all these (and more) need to be rationalized and quantified. To do it right and make the budget a real “GPS” for your business, it helps to partner with a professional who has hands-on operational expertise and has experience constructing budgets. These folks understand all of the various facets of a budget, appreciate the importance of getting the process right, and can provide a fresh perspective. Typically, they are not the same individuals who prepare your tax return. A controller or CFO would be the person doing this type of work inside your company. If you don’t have either of these on staff, consider a “CFO for hire” who has an operational background. These are the folks who are experts at planning and will agree that budgeting is both art and science.
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