What companies miss when creating a budget

A budget is essentially a roadmap of the business.

Most businesses understand the value of having a formal budget, but not many build a plan that helps their business achieve the level of success they strive to reach.

Goals don’t align with the business’ strategic priorities

A list of goals is not a strategy.

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. Goals are the things you want your company to achieve like increasing growth and profitability, expanding into new markets, etc. But they fail to prioritize these goals and create the strategies that help to 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.

The budget lacks cash flow analysis

The budget is often the first step in your company’s financial forecasting, so if you lack the processes in place 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, recurring of running your business, 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 business forecasts when cash should be paid and received and give you better insight into whether your company is at risk of running out of cash.

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 major effect on your budget. For instance, one of the biggest expenses for most companies is their payroll. Are there any roles within your organization that can be performed part-time as opposed to hiring additional full-time employees? Hiring part-time, or even fractional employees, will save the company money by not having to provide additional expenses such as employee benefits and paid holidays.

If your company leases or owns its equipment, selling or returning unused equipment will also help cut costs. Or if your company has any employee perks like company cars, gas cards, gym memberships, or other wellness programs.

Getting lean gives you greater flexibility and wiggle room in the instance that any unexpected or unforeseen costs may arise without decimating your budget.

You are too focused on the wrong KPIs

KPIs are the measurable data that indicates 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 which includes active users, revenues, and profits.

It’s important that businesses track and measure industry-specific KPIs. For example, professional service businesses should be tracking employee utilization, new monthly leads/prospects, cost per lead, cost per conversion, etc. Or 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 direction of the company. Signature Analytics can help guide your company through the budgeting process. If you need assistance creating a strategic budget for your business, contact us today.