Improving Your Budgeting Process
For many business owners, budgeting is a lot like dieting and exercise—we all know we should do these things, but we don’t always get it done, at least not consistently. However, just as good health is vital for your body, budgeting is vital for your company’s financial health because it plays a central role in strategic planning and execution.
Do you even have a budget?
While it’s never recommended, the truth is, a surprising number of small businesses operate without a budget. If your company is small enough, you may “know” how things are going based on experience. But growth makes this increasingly difficult and, eventually, impossible.
For many startups, the goal is often to raise capital, realize revenue, and then sell. You cannot do that efficiently without a budget. Unnecessary cash burn is a direct result of expenses without revenue, so investors want to see that you have a financial plan. And when your business needs to borrow in the future, lenders will also expect you to have a budget.
Lack of a budget sends the message to anyone you do business with that you are not very sophisticated. That makes your company a higher risk because there is no factual basis on which to judge potential financial strength.
Resource: Guide to Selling a Business
Do you update your budget?
If you do have a budget, how often do you update it? Ideally, you should have a budget for 1, 3, and 5 years. The process isn’t meant to be a one-and-done annual exercise—your budget is a tool that informs and guides ongoing operations. But only if you put it to work.
Improve daily operations
- Use your budget to compare numbers throughout the year. Every month-end is best but do it at least quarterly. (The longer you wait, the harder it can be to respond effectively.)
- Look for variances. Are sales lower than expected, or are expenses higher? Ask why. Are sales way up? Exciting as that may be, again, you need to know why.
- Discuss the numbers at the owner/board level. Reviewing monthly figures and the “whys” behind them enables you to control costs, correct causes of negative variances, and do more to replicate positive variances.
With budget review a regular part of business operations, you can make better day-to-day decisions and strengthen forecasting. You can make decisions proactively rather than reactively regarding issues such as capital costs. Should we buy that equipment? Is it in the budget? The budgeting process helps you understand the associated costs of ownership beyond the initial purchase price.
Get organized, with a budgeting process that fuels business growth
- Don’t simply rely on your bookkeeper or some other individual to create your budget. That person may be too busy with other work to devote full attention to this task. More importantly, it’s not likely they are in a position to make the kind of solid assumptions about every aspect of the business that go into a good budget. Instead, make it a group effort.
- Start with the previous year. Ask those in charge of each profit center/department to update last year’s numbers. This is a good way to get them focused on providing quality input for the new budget, and it underscores the importance of the budgeting process.
- Talk it over. Hold a C-level conversation with those who provided budget input to determine which proposed items can or cannot be included, based on the company’s overall goals. Update projections accordingly to finalize the budget.
Budgeting discussions can be challenging. Not everyone likes to have their assumptions challenged or hear that items on their budget “wish list” are not an overall priority. It takes good communication and political skills, and often someone from outside the organization can be the best choice to facilitate the conversation.
A fractional CFO can smooth and improve the process
Just as a personal trainer helps you develop a customized diet and exercise plan, a fractional CFO works with you to get your budgeting back in shape. They can come into your business over a period of 6-9 months to help develop and drive the budgeting process.
As an unattached third party, an outsourced CFO can ask tough or uncomfortable questions. They bring fresh eyes and professional experience to identify gaps and opportunities you may not recognize. Their presence also makes it easier to address problems you may have been avoiding.
Furthermore, they can help establish financial controls that are often missing in companies that have no budget. Controls dictate who approves purchase orders, credit card spending parameters, and limits, etc. to eliminate overspending.
With the help of a fractional CFO, you can develop a thorough, effective budgeting and review process you can follow on your own in the future.
Redpath and Company
Redpath and Company help clients make more informed decisions that contribute to their financial well-being by providing proactive, innovative, and value-driven CPA and advisory services for closely-held businesses, private equity, government entities, and nonprofit organizations. Core commercial industries served include retail, manufacturing, distribution, construction, real estate, engineering, and technology. Areas of service expertise include audit and assurance; personal, business, and international tax; state and local tax; sales and use tax; and succession and estate planning. Redpath also guides clients throughout the entire business life cycle with M&A advisory services (corporate and deal strategy, transaction support, and integration); accounting and financial management outsourcing; and valuation services. The firm was founded in 1971 and is employee owned (ESOP). With offices located in St. Paul and White Bear Lake, Minnesota, the firm ranks as one of the top CPA and advisory firms in Minnesota and is a top 120 firm nationally. Redpath is a member of HLB International, a global network of independent advisory and accounting firms. For more information, visit www.redpathcpas.com.
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