For many companies, the budgeting process has become an activity that adds little value. One survey of 130 CFO’s found that only 17% of participants would describe their organization’s approach to annual budgeting as “very valuable.” Establishing a reliable and an effective budgeting process early will help you avoid this common problem. With an effective budget, you will be able to attain your financial goals quickly.
Assess your current situation in order to budget effectively
Understanding what makes up current financial results will help you better understand how to get your business where it needs to be. To the extent that you have historical data, it’s a good starting point for your financial planning process. An assessment of historical financial data will help you determine your core operating costs. It will also help you gain an understanding of what you’ve done well and where you could improve. As you’re reviewing actual results, make note of these positive and negative trends so that you include them in your overall game plan for an effective budget. If you’re starting from scratch, begin by figuring out what you need to keep your business afloat and build on that, considering your expected income and expenses based on your business plan.
In both of these situations, it is worthwhile to get input from your peers and advisors who know your business and have been through the same thing. They will likely have valuable insight about unforeseen circumstances and lessons learned in finance that could help you build a better budget the first time around. Click here to seek advice on your financial situation by a Founder’s CPA Advisor.
Set budgeting goals, but don’t forget the game plan
Many effective budgets are based on specific net income or margin targets. Profitability is an important priority for investors and business owners, but goals shouldn’t be set without an understanding of how to get there. When setting goals, try to focus on how the goal will be achieved.
A first step is understanding what inputs will get you to your revenue goal. Looking at revenue in terms of volume and price is an important first check on feasibility. Next, performing an analysis of investment and resource needed will be a key part of your budgeting process. Remember that your effective budget should always use assumptions that allow for real explanation of why or why not a goal was achieved.
Review your effective budget goals and revise regularly
For new businesses and businesses new to budgeting, the first budget that you create is likely going to be off. There may be changes you didn’t anticipate, new investments you decided to take on to fuel growth or expenses you simply forgot to include. This is why the first budget you create should not be your source of absolute truth for the rest of the year.
When your first budget is fully drafted, it’s important to start reporting on budget versus actual every month. This will help you identify gaps in your budget and better understand items that are more difficult to forecast like those that are variable or infrequent.
Adapt your effective budget into your financial forecast regularly
Traditionally, an annual budget is set in stone and any over- or under-performance will simply dictate how you must perform in upcoming months to reach your final goal. However, for many companies, relying solely on a static budget doesn’t make sense. Adapting your budget into a financial forecast can help make it more effective.
One of the strengths of startups and small businesses is that they’re able to act on opportunities and correct missteps quickly. Your financial forecast should also be dynamic, serving as a tool for agile and informed decision-making.