Budget Time Again: Make it Worth Your While

A budget is a roadmap. Based where you have been, it can help guide you to your desired final destination. If you stay on the current course – where will you end up?  Alternatively, if you make course corrections or even change the route – where will you be at the end of the year?  It is up to you to decide which path is the most profitable and most likely to be achieved.

Here are a few things to think about as you prepare your budget.

How will you use your budget?
A budget can serve several purposes. It can help you determine whether your business meets your profit requirements, given reasonable assumptions. If you can’t pencil it out on paper, then odds are the business model needs a re-haul.

Tracking actual-to-budget provides visibility into whether you are meeting your revenue and expense goals. Reviewing this on a monthly basis allows you to course correct mid-year.

Lastly, updating the budget and reforecasting throughout the year provides a projection of year-end profitability. If you are a business owner, this is great for tax planning.

What is different this year?
This is a perfect time to look at last year’s performance and assess how well the business performed against beginning year expectations. Did you achieve all of the goals and objectives you set out for yourself at the beginning of the year?

If not, what kept you from making these goals? Were there any big surprises? Were they one-time events, or has the underlying fundamentals of the business changed?

Now is the time to think hard and plan your business for the coming year.  Make sure all information is up to date. Then, if the status quo won’t get you to where you want to be at the end of the year, what changes are you going to make to the business? What will it take to implement these changes – both in time and money?

For instance, perhaps you plan to increase sales by introducing a new product line, adding salespeople or expanding to a new site.  If so, how much incremental revenue do you expect to generate and at what cost? Do you expect your existing staff to be more productive? If so, have you given them the proper tools and incentives? A budget is your tool to track progress.

Similarly, you need to plan for any anticipated capital expenditures. Perhaps some of your equipment needs to be replaced or upgraded. Or, you need a vehicle for the new route you are planning. Will the purchase be funded through a line of credit, loan, or working capital? How will it affect cash flow and depreciation?

What level of detail is right for your budget?
Budgeting and business planning can be as detailed as you want or need it to be. If you are a hands-on manager and there are no big growth initiatives for your business, then you can probably live with less detail. However, if you are watching costs (and who isn’t?) and/or are making changes to your business, then you will want more detail in order to track progress against target(s).

Your budget can be very powerful, both in managing expenses as well as in planning and forecasting business performance. The budgeting process is a great opportunity to reassess your operations and develop a realistic roadmap for the coming year.