Chances are, as a business owner or decision-maker, you are always running from point A to point B. You have a call with a prospect at 7:15, need to drop the kids at school, and somehow get in the office for a meeting at 8:00, and when you get there your secretary needs a signature on a check, your VP is asking about the phone call, and you still haven’t had a cup of coffee. At this moment, the last thing on your mind is how to do a budget for your business. You are not alone. So many companies fail to create a good budgeting plan to help them head down a path full steam ahead.
However, a budget is essentially a roadmap of the business, and without one, that path you are headed down could have a dead end.
While most business executives understand the value of having a formal budget, it’s one of those tools that often gets overlooked or de-prioritized when you’re busy running the day-to-day. Without it, the business you are making so many sacrifices for may very well fail.
We don’t want to see that happen, so we have crafted the top factors that decision-makers often overlook when they create their business budgets. That way, despite the chaos of your daily schedule, you don’t have to remember these often missed budget categories.
1. Goals Don’t Align With Strategic Priorities
Let’s start by simplifying the difference between a goal and a strategy. A goal is what a company wants to achieve over a specific period of time. Goals are typically outlined in a business plan and could pertain to the entire business, specific departments, or certain employees or customers. A strategy is a long-term plan of action designed to achieve a goal. See the difference? A list of goals is not a strategy; they are merely a light along a strategic path, indicating your business is headed in the right direction.
One of the biggest mistakes you can make when building your budget is to list goals that don’t align or support the business’ strategic priorities.
Often we see many companies confusing strategies with goals. It is crucial to remember that goals are what you want your company to achieve, like increasing growth and profitability, expanding into new markets, and more. When setting goals, remember to be specific and realistic. Then, do not fail to prioritize goals and be sure to create strategies that help accomplish them.
Identify critical priorities (tasks that need to be accomplished immediately), followed by important priorities, and so on. Then determine the goals that support these strategies and put them into action.
2. Cash Flow Analysis Is Missing From The Budget
How do you know you are fit to run a marathon? Likely, you have trained, bought the right pair of shoes, and done a health check-up with your doctor. In this scenario, a cash flow analysis is the clean bill of health your doctor provides. It is a way to check the financial health of your business.
Often, a good budget is the first step in your company’s financial forecasting. So, if you lack standard, consistent processes to track the cash flowing in and out of the company, your business is setting itself up to fail.
Monthly revenue forecasting can help you make important decisions about your business. Since fixed expenses are generally unchanging and recurring month-to-month, these should be forecasted. Similar to your fixed expenses, variable expenses are the costs you pay every month but can change over time.
Proactive cash flow management ensures that your forecasts of when cash should be paid and received, giving you a better insight into whether your company is at risk of running out of money.
Read more: What CEOs Need From Their CFO
3. You Have Failed To Cut Costs
Fast-growing companies are often cash-strapped, but there are many ways to reduce the amount of money flowing out of your business. One of the fastest ways to do this is by cutting costs.
Cutting costs can have a significant effect on your budget. For instance, one of the most essential expenses for companies is payroll. Are there any roles within your organization that can be performed part-time? Hiring part-time, or even fractional employees, will save the company money in the long-run. Not having to provide other expenses such as employee benefits and paid holidays can really pay off, literally!
If your company leases or owns its equipment, selling or returning unused equipment will also help cut costs. Another idea is to consider what employee perks your company offers, like company cars, gas cards, gym memberships, or other wellness programs. Consider asking employees what they appreciate most and whatever doesn’t make the list can get cut from your budget.
Getting lean gives you greater flexibility and wiggle room in the instance that any unexpected or unforeseen costs arise without decimating your budget.
4. You Are Focused On The Wrong KPIs
KPIs, key performance indicators, are the measurable data that demonstrates the performance of various processes. So it’s important to understand the difference between vanity metrics (which give you a false sense of success) and the metrics that show the true health of your business. These metrics will often include active users, revenues, and profits.
Businesses must track and measure industry-specific KPIs. For example, professional service businesses should be monitoring employee utilization, new monthly leads/prospects, cost per lead, cost per conversion, and others. A manufacturing company may focus on labor as a percentage of cost, maintenance cost per unit, or on-time orders and shipping.
Having a budget that includes both long and short-term objectives allows your business to create a focus for the future direction of the company. Without it, you could be leading your company down an unclear path that could ultimately lead to the demise of the business.
Remember, Signature Analytics is here to help guide you through the budgeting plan, which includes setting and tracking the right metrics and KPIs. If you need assistance creating a strategic budget for your business, contact us today.