A budget isn’t just a piece of paper; it’s a tool for your business.
The majority of businesses out there don’t have a formal, written budget or plan. Maybe the business owner has put one together and then put it away in a drawer and hasn’t revisited it since. Perhaps the business doesn’t have anyone who can put one together. Or maybe the owner just doesn’t know where to start.
As the owner of your business, having a budget is critical because it allows you to define your goals and make the strategic decisions that are imperative to the survival of your business. By using your budget as a tool, you can not only track performance but identify risks and opportunities.
Budgets that fail are often the ones that were unrealistic. Just because you had a great Q1 doesn’t mean that Q2 will be as strong. Past revenue does not guarantee future revenue.
What steps should you take to ensure you create a strategic budget that sticks versus one that fails?
Your department heads should have a general grasp on what they are want to accomplish within their department including plans on how to get there, areas within the department where they may be able to cut costs, or other valuable input that can help make for more precise budget planning.
There are usually at least 2-4 people from your company who you’re going to need significant input from when creating your budget. When you begin your budget planning, be sure you are soliciting input from all of your critical departments.
DETERMINE YOUR GOALS
What are the goals of your business?
Whether you are looking to launch a new product, increase your market share, reduce expenses, increase productivity, or have better cash flow management, your budget acts as a path to accomplishing these goals.
Well-defined goals (that can be measured) can improve every aspect of your business. Have a process in place to help you measure these goals and hold your department heads accountable for hitting those goals.
DETERMINE YOUR COST DRIVERS
What are the factors in your business that incur costs?
Determining your cost drivers will help you make more accurate expense projections. Cost drivers are dependent on the type of business it is. For example, if you own a manufacturing business where machines need to be set up, your cost drivers could include setup time as well as direct labor hours. Identifying those that impact your business will improve your budget.
MONITOR AND ANALYZE
Your budget can work as an accountability tool for both you and your department heads and can be monitored with performance reports. Benchmarking helps improve performance, allowing you to analyze past performance against current performance or even assess how your business is performing against industry averages. This ongoing practice helps to determine whether the business is falling behind your plan (and help you get back on track), or allow you to see what you are doing right so you can replicate those activities and continue to grow.
The goal is really to understand how to control the business, which can be extremely difficult. Going through this disciplined approach of planning your budget and sticking to it will help you get there. Signature Analytics can help guide your company through the budgeting process. If you want assistance creating a strategic budget for your business, contact us today.