Ruminations

Your Business - Budgets

Welcome to Your Business, our blog series that contains more advice and fewer metaphors. Each post will try to cover a subject that affects your business. You can find more of our Your Business series here.

Budgets are important. Not just because you should know what your expectations are of your business' finances. But because creating a budget compels you to think about what your plans are for the upcoming year. Sure, you could wing it without a budget, but that's like going grocery shopping while you're hungry.

Do you have big plans for your business in 2020? Are you planning to launch a new product or service? Are you planning to hire more staff? Can your business afford to? Only your budget knows for sure.

But who has time to create a budget during the holidays, or while trying to close out last year? Nobody, that's who. That's why you should try to finish next year's budget before the holidays. On Thanksgiving, let one of the things you give thanks for be, "I'm thankful I'm done with the budget".

Budgets can be tricky and time-consuming. But you don't have to tackle them all by yourself. We'll have more on getting help with your budget later in this post.

There are many types of budgets you can create for your business. Some are very specific, such as a marketing budget or a production budget. But this post is going to focus on a plain vanilla annual budget.

A budget is a plan. A plan of what you expect your business to earn and a plan of what you expect your business to spend. It's important to make the effort to get your budget as accurate as you can. No matter what your accountant says, it's OK if your budget is close enough as long as it's not so far off as to put your business in jeopardy.

Creating a budget is more than just an exercise. It compels you to evaluate your business. But your budget assumes everything will go as planned, and when was the last time that happened? To quote Eisenhower, "Plans are useless, but planning is indispensable." This applies to your budget as well.

Budgets can serve two purposes. One is to lay out the roadmap for your business' upcoming year. And the other is to try to learn all you can from last year. Looking back isn’t to measure your performance as a business owner, but rather to gauge your ability to accurately forecast the future of your business. You can improve the quality of your next budget by reviewing your previous one.

But who has time to look back? It should come as no surprise when I suggest you do this right before you start next year's budget. This year may not be over yet, but you should have a pretty good idea how well your current budget served you by the beginning of November. If it helps, you can dress up as an accountant for Halloween.

What are you looking for when you compare your budget to your company's performance? Ask yourself these types of questions:

• Where did you overachieve?
  • What was it that helped you exceed your expectations, and was it something under your control?
  • If applicable, are you increasing portions of next year's budget to include this year's performance?
  • Will you take a chance on something new next year?
• Where did you underachieve?
  • What was it that prevented you from meeting your expectations, and is it something under your control?
  • Are you going to try again in the new year, and are you going to approach it differently?
  • What is the most important thing you learned from this deficiency?

When reviewing last year, if your company's performance was close to your budget, give yourself some credit for doing a great job. It means you know your business very well, and/or you did a yeoman's job of sticking to your budget throughout the year. Also, be thankful you had no surprises that significantly affected your business.

Budgets aren't just useful for planning the upcoming year. You should create a budget for any new project, event or program you launch. These are much easier than your annual budget, but they can include more granular details.

don't do this: Some small businesses try to get by treating each year as though it is its own "project" — the project being "make it through another year".

Project budgets can't always show that they'll increase or even generate revenue, let alone have a return on investment (ROI). There are projects within your business that may only provide additional services to your clients (e.g., a client portal or redoing your website) which cannot be easily associated to increased revenue (let alone profit).

There are also projects that can improve morale, and indirectly improve employee productivity, but on the books show as pure expenses. These can include renovations, or upgrading office furniture or computer monitors.

It's very important for both of these types of projects to have a budget specifically because they will not have a direct revenue component. Staying within your project's budget, and timeline, is crucial.

do this: At scheduled points throughout the year, or when you're launching a project or initiative that was in your budget, take the time to refer to your budget. Your budget was created when you had a clear mind and a clear vision of what you wanted to do. Use it as a touchstone and an advisor to keep you on track (unless things have changed considerably).

Creating a budget can seem like a lot of work, and if you've never done one before it can even appear overwhelming. But you don't have to do it all by yourself.

If you have department managers, be sure to include them when creating the budget for their departments. Unless you're very hands on, your department managers' insights are going to be the guardrails that keep your budget process on track.

Many businesses have their department managers create a preliminary budget for their department. No one knows their department's needs, strengths and weaknesses better than they do. This can save you time and effort, as well as provide you guidance from trusted resources.

You can look at the general ledger expenses for the previous year to get an idea of what this year's expenses may be. But knowing how and why the money was spent is important too. To really understand the how's and why's of a department's processes, production and expenses, be sure to listen to your department managers.

There are a lot of online and software resources that can help you create your budget. When the time comes you can use your favorite search engine to find one that suits your needs.

The first step of creating your budget involves some self-reflection. You need to ask yourself some important questions, and you need to be honest with yourself. Try to do this while you're not at work. Try to be some place quiet and peaceful, maybe even while sitting in the sun. A clear mind, without work distractions, is always helpful.

• Do we want to increase sales? If so, how are we going to do it?
  • Are we going to increase our marketing efforts?
    • Will more marketing generate more sales, or do we need to update or diversify our marketing efforts?
    • Do we have enough sales people to support an increase in marketing and the resulting prospects?
    • Do we have enough customer service personnel to handle an increase in sales?
    • How much will all of this cost, and can we afford it?
    • How much extra revenue do we expect it to generate?
    • Is the increased revenue worth the extra expenses and effort?
  • Do we need to increase prices, and if so, will we lose customers and/or prospects by doing so?
  • Can we, and do we want to, offer new products or services?
    • Ask yourself the same questions you did about increasing your marketing efforts.
  • Can our systems handle an increase in prospects, customers and sales, or are we going to need to upgrade or replace our software?
• Do we want to reduce expenses? If so, how are we going to do it?
  • Which of our products or services are the primary reason our customers use us as a vendor/source?
  • Do we offer products or services that are not profitable enough, and if so, can these be scaled back or discontinued?
  • Do we have loss-leaders that are not a primary product or service?
  • Where can we increase efficiency in our organization?
  • Would system upgrades or new software improve our efficiency?
  • Would increasing efficiency result in a bigger benefit than reducing products or services (and the affected personnel)?

You can see how just a few basic questions can quickly snowball. Once you've gone through this exercise by yourself, have a meeting with your department managers (and essential personnel) to ask them these questions. Many businesses have their department managers ask these questions in preparation for the group meeting.

The new year is already underway. Hopefully our planning will help us guide our business to another successful year. It's better than the alternative of holding on for dear life while reacting to everything we encounter.

Budgets are about business, which means — essentially — they are about money. But budgets are also about people. No forecasting models can replace the experience and insights of your staff. So, to insure your budget helps you turn a profit, make sure you include your team in the budget making process.

---