Creating a successful annual budget is one of the most important things you can do for your company. As a strategy, it allows you to know and view the use of company resources. Those resources include people, time, capital, and products or services. A good budget allows you to formulate a strategy. It also helps you to manage performance and make critical adjustments before a significant downward impact is felt.
If you are a small or mid-sized business, you may not believe you need to create a fiscal year budget. It is more critical for smaller businesses to have an annual budget because it quickly identifies cash flow issues. A good budget helps you to avoid potential bottlenecks and spotlights resource misuse. Organizations that spend the time to create dynamic budgets minimize adverse financial surprises and experience production at peak levels. This all translates into success. Not sure how to create a budget? Use this quick start guide to begin.
Establish Strategic Priorities and Timelines
The first step in creating a budget process is to double down on your specific financial goal. Once you have the end goal in mind, work backward to establish a timeline. If you have department leaders, make sure to gain their input on the timeline, as this allows for ownership of the timeline and encourages participation. Most companies begin their budgeting process for the upcoming financial year around October. For example, begin work on the 2022 annual budget in October of 2021. This allows you to have the budget process completed and ready for implementation on January 1st. Some great online programs exist to help you make a timeline.
It is difficult to create a timeline for a goal if you have not identified strategic priorities. What are your business’s priorities, and more to the point, how do they line up with budgetary goals? Moving targets are harder to hit. Take the time and gain input from others to make your goals well defined and attainable.
Revenue Projections, Expenses, and Cash Flow
If you are a small or mid-sized business, then your projected income projections might formally have been quite simple: Make More Money. But simply stating the obvious does nothing for bringing you closer to that goal. Forecasting your income and tracking your sales for the upcoming year is not as impossible as you think. If you are not certain what your annual revenue will be for the next year, most experts suggest projecting three different scenarios: the most likely projection, the best-case projection, and the worst-case projection. It takes more time to project three different scenarios, but it allows you to adjust up or down more readily as revenue shifts up or down. Several financial planning and analysis tools exist to help you do this, with a “wizard” that takes you through the process.
A good rule of thumb is to create a financial cushion around the worst-case projection so that if the worst does happen, you are prepared to weather it. In the event you enjoy the benefit of a best-case financial year, then use that money to expand or supply backup capital for leaner times.
Once you have your projected income, begin calculating estimated costs for the upcoming year. The easiest place to start is with fixed expenses. If you plan to expand, include the cost of the expansion. When it comes to your workforce, make sure to account for those expenses as well. These can include:
- Computer and office equipment.
- Employee compensation programs.
- Raises and salaries.
- Training programs.
Enlist the aid of department leaders because they can specifically provide costs for resources needed. Department heads are up to date on any new regulations or algorithms and offer great insight into costs. Make sure to communicate that you want the status quo projection and not “wish list” costs. It is great to have that as well, but make sure it is separate from the actual required costs.
Preparing a budget must include and allow for capital expenses. Capital expenses are those costs you spend on business cars or trucks, office furniture, computer upgrades, or construction to expand the building. Keep in mind that for tax purposes, such purchases are depreciated over time. This impacts your projections. Cash flow is created from the compilation of projected revenue with expected expenses figured in. This gives you a clearer idea of when your company may experience a lean month and which seasons will see a financial surplus. With this data, you can formulate a plan to see you through the projected lean months by saving surplus from other months.
Implementation and Monitoring
After your budget process is complete and all department heads have agreed to it, you need a plan for implementing it. If you have a team, this is the best time to have a strategic meeting. In the meeting determine how you will introduce the new plan to the rest of the workforce. Clear guidelines and expectations, as well as consequences, must be evident and agreed upon. This allows the transition to be a smooth one. While most companies implement their new annual budget at the beginning of the year, if your business is a new one, it is important to get started immediately. This allows you to learn how the process works and to make adjustments as needed. Make sure to take notes on things you wish to change for next year’s annual budget. It is advisable to review your financial statements often. A good way to do this is to use revenue management tools, which allow you to compare your actual income/expenses to the projections.
For example, when looking at your monthly financial statements, you discover that you had to dip into your cash reserve to pay a bill. You would then go to your annual budget projections and discover where your projection was off, and you exceeded your projected cost. This allows you to make the adjustment for upcoming months and thus head off a repeat occurrence. In essence, your annual budget helps you keep track of all the moving parts of your business in one document.
Monitoring the plan as it is implemented is crucial to its success. How will you judge performance? A good way to start is to compare the income gained against the actual projections you made. Compare on a monthly or weekly basis. Waiting to do this quarterly may not leave you enough time to make quick adjustments before it impacts your bottom line. If the numbers do not closely match, then you must determine why the financial goal was not reached. Many companies do a ‘revised budget’ every quarter using the data generated for several months. If your company is service-based, then a customer service assessment is also recommended. Qualtrics customer experience platform helps you gauge whether this department is meeting prescribed goals and targets.
Many business owners dislike preparing a budget. Most are not in the habit of revisiting them every month. However, to be proactive, you must keep an eye on the annual budget. It is your roadmap or blueprint to financial success with your company. If this is the first time, you have created a budget, understand that some adjustments will be necessary. Give yourself the leeway to make these adjustments as you go. One of the best practices is only to make adjustments and changes to the budget once you have determined there is an issue and after discussing it with department heads. All too often, new business owners are unrealistic with their projections. It may be tempting to project wild success, but those inflated numbers spell disaster when it comes to implementation. The best rule of thumb is to use conservative numbers when making projections. It is often the most accurate model.
Building an accountability factor with your department heads is crucial to productivity. But how do you get them to buy into the new direction and budget process? One of the best ways is to be inclusive and listen to the feedback offered. Leaders of departments like to know they are being heard and that their opinion is valued. Often the solutions offered are excellent and end up saving the company money. This accountability factor also allows for future communication in the quarterly budget strategy meetings. If your company outsources much of its leadership, then using webinar conference software can create a secure space for the team to meet, which is essential. In these meetings, your department leaders can tell you why certain financial goals were not met and suggest ways to meet them.