In part 1 of our budgeting intro, we looked at why it’s important to review your business’s past performance as a starting point for building a budget. Once you figure out the important metrics for your particular situation and get the hang of this process, it’s pretty straight forward. Prepare reports, review, repeat. Prepare monthly reports, review, repeat. Prepare reports, review, repeat.
But when it comes to planning for the future, you can start to get a little more imaginative in your approach.
This is where you can apply your vision and creative thinking to developing a business plan for the coming year. Below are some suggested inroads to starting and developing your budget. How you apply them will depend on your style, your business model and the maturity of your organization. For every business owner or manager out there, there is a different budgeting process, so find what works for you!
Before you get started though there is a truth to reckon with. Budgeting is an inexact process. You will never get it “right”. So, pour yourself a glass of wine, take a deep breath, and accept the fact that you aren’t going to predict the future with 100% accuracy.
The key point is that the power of a budget isn’t in its ability to accurately predict the future. The power of a budget is the in the questions it forces you to ask.
By developing a vision and a set of assumptions, you begin to understand the underlying tasks and “sub-goals” you need to achieve to reach your larger vision.
If you want to increase your profitability by 5%, then you’ll have to figure out how much you need to increase your sales and decrease your costs. If you are a not-for-profit and you want to increase your programming, what are the associated expenses and “capacity burden” on your current staff? What won’t they be able to do if they are delivering more programming or adding new members, or taking on a marketing initiative.
On a very practical level, most managers take their profit and loss for the previous financial year broken out by month and use this as the basis for preparing the profit and loss for the future. Then, you predict the coming years profit & loss by month using the following mindsets:
- Vision – What is your overall vision for the organization or business in general and for this year in particular? Do you want to deliver a particular product to the world? Do you want to make $300K in dividends? Do you want to offer services to underserved communities. What is changing in the coming year?
- Research – What is happening in your industry that is important for you to know as you plan for the coming year? This will be more important for certain industries that others (those tied in with government regulation changes, etc) but it’s alway important to have your finger on the pulse of what is happening in your sector.
- Advisory input – Mentors and coaches outside of your organization can offer valuable insight into your planning. Their detached perspective means they can provide a perspective and analysis that might be distanced from the outcome. Find someone who can give you that outside opinion.
A budget should undergo several edits – no “one and done” here! Expect to spend time following up on questions and completing research. Leave time to get feedback from your team and your advisors. Let the questions and feedback roll around in your head.
But most importantly, take the information and insights that come from your budget development and start to apply it to the day to day operations of your business. This analytical thinking is the true value of the budgeting process.
Next up; Turning your budget into a cash flow projection.