Why Every Business Owner Should Implement a Budget, And How To Do So

Many business owners that I talk to do not have a budget or a business plan in place. “I’ve never had a budget or a plan, why do I need them?” and “If I had them what would I do with them?” are common comments, so much so that I now consider these comments “normal”.

If a business plan provides the roadmap for the business, the budget when compared to actual results provides monthly benchmarks that answer the owner’s and management team’s questions of “How are we doing?” and the inevitable “Are we there yet?”. If actual results vary significantly from the budget, the owner and management team can analyze the results to answer “Why?” and take the needed action steps to get back on the right road.

road and green traffic light

 

“We used to hope to achieve our goals. Now we expect to.”

 

 

Another major benefit of a budget for the owner is the budget development process itself. A well-managed process will yield clarity of purpose, define accountability and improve business results. For instance, the owner and the sales team could determine the monthly sales goal amounts to incorporate into the budget. The sales goals are clearly established and visible, and the sales team knows that they will be held accountable to meet those goals, and if the goals are not met, expected to explain why. Other management team members will be in the same position for their areas of responsibility.

Implementing a budget, the related budget to actual reporting and monthly review also brings a discipline to the team. The team knows that they will have a regular “pit stop” that allows them time to review and reflect on how the company is doing, what is working well, what is not working well and what needs to change, and to prepare for the next leg of the journey.

How to Develop and Implement a Budget

Developing and implementing a budget can seem overwhelming to owners who have not done so previously. The following are some overview guidelines to help make the process as painless and effective as possible.

  • The budget is important. Do it right.
  • Determine who will be developing the budget
    Do you have someone in your company who has done this previously? If so, assess their experience and skill level by asking how they would go about developing the budget. If the responses don’t sound right, or you don’t have the right experience and skill level on your team, or the person with the right experience and skill level doesn’t have “security clearance”, consider using an external advisor.
  • Determine the software to use in developing the budget
    Many people use Excel to develop their budgets, as you will have some calculations and will most likely want the option to run some “what if?” scenarios.
    However, Excel presents its own problems such as formulas becoming inaccurate as changes are made. I and many of my fellow B2B CFO® partners use a software called PlanGuru with our clients. This software provides the capability to develop a budget that includes the income statement, balance sheet, and cash flow statements. It also provides budget to actual reporting, forecasting and dashboard analytics.
  • Keep the budget simple initially. It can always become more complex to meet your needs
  • Determine your primary financial and operational goals for the coming year (i.e., desired results)
    When I ask owners their input for my developing the budget, I’ve had more than one owner give me their revenue/sales goal (e.g., $10 million in revenues), and their gross and net profit percentage goals. That’s it, and that’s okay.
    You may have additional goals such as adding employees, leasing new equipment, etc. If so, you’ll need to provide the timing and costs for these activities.
  • Obtain input from your management team for their areas of responsibility
  • Use the current year’s annualized actuals as a starting point (e.g., if you’re starting with November (11 month) year-to-date actuals, remember to annualize this data for an entire year (12 months)). Then:
    –  Use percent of sales to determine dollar amounts for variable costs such as raw materials
    –  Adjust the year-to-date numbers for accounts that you know are going to increase (e.g., payroll to reflect anticipated raises, health insurance, utilities, etc.)
    –  Straight-line (divide by 12) the remaining costs
    –  Adjust for seasonality as needed
    –  Include planned changes such as the before-mentioned additional employees, new equipment, etc.
  • Verify that the budget reflects your financial and operational goals, review for reasonableness and adjust as needed
  • Review with management team and obtain their buy-in
  • Import/enter the budget amounts into your accounting software to use its budget to actual reporting capability
  • Generate budget to actual reports monthly and review with management team. Make corrections/improvements to operations as needed to achieve desired results

You’ll now have regular measurement of where you are on the road to achieving your goals. Or as one of my clients stated, “We used to hope to achieve our goals. Now we expect to.”

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