Hint: And get the answers…
We have said it before, and we will repeat it, having an annual budget for your company is like having a map on a road trip. Without one, you will be lost and taken down paths that won’t help you reach your destination or goal.
The process of creating a budget must begin somewhere. You cannot merely build an important document like this without understanding some key elements of your company and its financials.
In this article, we are going to review some of the top questions that you should be asking your accounting team or financial advisor before building out your business budget.
These are the kinds of questions that will help to understand revenue, expenses, future projections, where you can cut back, and more. Having all of these details will help to discern the financial ins-and-outs of your business better.
These are the top questions you should be asking throughout this process.
What Is Our Current Operating Plan?
One of the most crucial questions you can ask at the beginning of this process is what is our current operating plan and what is the breakdown of our monthly expenses. (If you don’t yet have an operating plan, there is no better time to create one then right now.)
Identify all of your monthly operational costs, as well as the costs that repeat quarterly or yearly. Once you have it all organized, you can obtain reports from your accounting system, total the expenses to determine the final numbers.
Not sure what should be included in your operating expenses? Think of rent, utilities, employee costs, office supplies, equipment, etc.
Does gathering all of this information sound like too much effort? You can always contact our team to help you get an accurate number and keep track of your operational expenses month-to-month.
The details within the operating plan should also help outline the vision for the year, set goals, and determine KPIs. If you need to raise capital, bring in new investors, or hire new managers, this will all be items to take into consideration when formulating your operating plan.
What Revenue Is Expected For The Coming Year?
To be able to put this operating plan in motion or have it continue on course, you will need money (this isn’t rocket science). Therefore, it will be important to determine a dollar value for each line item in your operating plan.
Where are you going to get the money to cover these planned expenses, or where is it currently coming from? Does your revenue bring in enough money to cover these costs, or are you short and relying on company credit cards to cover the rest? Do you need to land new accounts or gain new customers? How much more revenue do you need to hit all of the goals you have for the coming year?
Determining cash on hand is a crucial part of this process as it will set the bar for where you are at compared to where you would like your company to be. Once you have your number for expected revenue for the year, your budget can be based on these numbers.
What Does Company Cash Flow Look Like?
If your company reports yearly earnings of $5 million, how likely is it that $5 million is sitting in your company bank account? The answer is slim to none. Financial statements that offer this kind of reporting will always include non-cash items, which is why it is critical to understand company cash flow.
When your company pays employees, pays utilities, pays vendors, or makes other payments, this is considered an outflow of cash (the cash is leaving your company). When your company received payments from customers, investors, settlements, or accepts other kinds of money, this is called an inflow of cash (cash is being brought into the company).
Never do you want your company’s outflow of cash to be larger than the inflow. Once you create your annual business budget, you can break it down even more into months or weeks to help ensure payments can always be made while keeping your company still in positive health.
What Upcoming Projects May Impact Our Financials?
At this point, you have the majority of your costs documented, but here is where you can take this process one step further. Making predictions based on company expansion plans can help you better plan for your company’s financial future.
- Consider any plans that may have been put in motion, such as:
- Moving to a larger (more expensive) office space
- Investing in a new piece of equipment
- A significant expense of upcoming travel
These expenses can be anything beyond the typical day-to-day or monthly planned expenses. Taking these into account will help you to ensure your business will be kept running smoothly and no costs sneak up on you.
Beyond the next few months, take into consideration big plans for the next three years. Determine if your company can feasibly save some revenue from this year and roll it into savings for the year or two after that. If you are able to create some financial buffer, it will only help the future of your business.
Where Can My Company Spend More Money?
Wait…what? Spend more money? Yes, you read that right. Here’s the good news: If your company is financially healthy, you can start looking for opportunities to spread that money around.
For every company, this will look different. Maybe it means you can hire a new employee to help with your marketing department. Or, perhaps you need a new contractor to help build a new company website or mobile app. If you are able to, consider what these opportunities might be and how they can be implemented to help carry your business to the next level.
Where Can Expenses Get Cut?
As you are carefully reviewing all of the company numbers, you might find your business is not as healthy as you’d hoped. Or, you might be delighted with the numbers, but want to start creating more of a financial buffer mentioned earlier.
If you are looking for opportunities to cut down on expenses, keep in mind that no savings are too small. If you saw a quarter on the ground, would you pick it up? If you picked up a quarter every day for a year, you’d have a little over $90 in savings.
While finding a quarter every day might be unrealistic, you can take another look at your bills, rental space agreement, vendors, and more. Can you get a discount, cut back on certain software programs that aren’t being used, or get cash back for paying for expenses upfront rather than month to month? Taking a creative look at ways to cut back can total to more savings by the end of the year.
Once you are able to sit down and get a handle on all of these numbers, you will be well on your way towards creating an accurate annual budget. This document is crucial for all businesses and can help to create a framework that will be reliable for making financial decisions on in the coming months and year.
If there is any part of this process that seems confusing or that you think you would like help with creating, please know that the team we have at Signature Analytics is ready to help you and your company. Our financial experts can act as a second pair of eyes to look through your financials and ensure there was nothing critical missed throughout the process. Or they can start from the very beginning by gathering the documents and statements needed to build the annual budget. Please contact us today to speak with someone from our team.