Every fall, executives and managers undertake a familiar exercise—creating a budget for the coming year. Many dread the process, which can be long and frustrating. But a good budget provides several benefits for business owners:
Big-picture thinking: Budgeting takes you out of the day-to-day and into the big picture of your business. It forces you to look ahead, assess your competitive position, consider where you want to take the business, and decide how you’re going to get there.
Decision-making assistance: It’s helpful to have benchmarks to guide your decisions and keep you flexible throughout the year.
Problem anticipation: With good tracking and reporting, you can quickly see potential problems and take action to accommodate or correct them.
Profitability input: Owners sometimes lose sight of precisely where they’re making money and where they’re spending it. Budgeting adds clarity.
Cash flow insight: This is perhaps the most important benefit to business owners. A well-developed budget forces owners to think about the ebbs and flows of the year and understand how these changes affect cash flow.
To make the most of your budgeting process, it’s essential to give executives and managers the tools they need to create realistic budgets. It’s also wise to foster a budgeting mindset that promotes realistic inputs.
Here are some ideas to help you create budgets that will work for you:
Start—and stop—early. One of the biggest complaints about budgeting season is that it lasts way too long. You can probably get it wrapped up in a month if you ask for the right inputs. Don’t ask for details you don’t need, particularly those related to spending far into the future.
Set the right tone. A budget is only as good as the inputs provided. If you want honest inputs, be open to discussion about budget requests. For example, adding a “special initiatives” section might produce innovative ideas that are worthy of review—and extra dollars.
Use the right tools. Technology can help you streamline your process. Take advantage of data analytics to assess various performance drivers. Predictive modeling can help you accommodate non-performance inputs like economic or supply trends if applicable.
Link budgets with reporting. This seems like a no-brainer, but a surprising number of companies create budgets in a vacuum and don’t track results in a meaningful way.
Get active buy-in. Employees can only be held responsible for what they can control. That’s why getting active buy-in is so important. The budgeting process should involve employees up and down the org chart. This also results in more realistic numbers.
Share results. Another complaint about budgeting is that the results go nowhere. By sharing relevant reporting with employees on a monthly basis, everyone is informed about performance markers. For certain employees, relevant reporting might just be a line item or two, but even that will keep people moving in the same direction.
Review the process. Learn from your mistakes by reviewing the budgeting process yearly. What worked and what didn’t? How accurate are various departmental projections? What’s your biggest miss each year? By digging into these types of questions, your budgeting process will get better and more accurate over time.
Your budget should be a living thing that’s viewed, updated, and vetted against performance regularly. For planning purposes, many managers like to see a rolling 13-week cash projection that breaks the budget into weekly numbers for the coming quarter.
Your CPA can assist you in designing a budgeting process that will work for your company. He or she can also help you review both the initial results and ongoing reporting to help you make sound business decisions.