Your budget is a management tool that also helps your business plan for its financial growth. Planning alone is not enough. A budget can help manage your costs, determine whether profit goals are within reach, and monitor cash flow. Basically, your budget is a tool that can help keep your business from failing while putting you in better control of your finances.
So why are so many companies still building budgets that end up failing?
You don’t know what your cost drivers
Cost drivers are the activities that drive up the cost, so as the activity goes up, the cost goes up as well. Why do cost drivers matter to your budget?
Certain cost drivers can move away from the actual true cost, which is why it’s important to find the best cost drivers to use. What activities influence your company’s revenues and costs? Determining your cost drivers will help your business make more accurate expense projections.
Identify your cost drivers and and use them to develop strategies. Your budget should also include metrics to monitor activities in real-time.
You didn’t consult your department heads
Your budget is a useful tool of managerial control. Your department heads and managers have a firm grasp on what they want to accomplish within their department. Since they likely have a more granular insight into their department than you as the owner do, they can provide sufficient value with their input which helps make for more precise budget planning. Not only does the budgeting process help managers become aware of other managers’ plans, they also get to participate in goal-setting.
If you didn’t consult with your department heads during the budget planning process, ensure that you get their input for future plans and update your annual budget accordingly.
Your budget is unrealistic
How can you determine whether not you have created an unrealistic budget?
Say your business has generated 400k in sales every year for the last three years. However this year, you have a new team and have determined sales will exceed $1 million. Your budget isn’t the place for you to shoot for the moon. You most likely won’t land among the stars, but instead, land in front of your board having to explain why you failed.
Building a realistic budget requires determining revenue earned from all streams including fixed and variable costs and any one-time payments that may be coming up. It is critical to look at historical financials and average increases and then use those findings to implement a budget.
You don’t use it
How can your business evaluate its performance if it isn’t comparing monthly results over time?
Ignoring your budget can result in overspending or losing track of your goals. Say you were planning on spending 10k per month for marketing and advertising as a means of increasing sales. But you didn’t spend anything, causing a loss of brand awareness as well as a decrease in sales. Or maybe 10k per month was the plan, but instead your company spent 50k per month and as a result, and then ran out of capital.
Your budget shows projections and estimates for future costs and expenses, so you should be continuously checking your plan to ensure these are accurate and make corrections if needed.
Signature Analytics can help guide your company through the budgeting process. We will work with your management team to create an annual budget for your business and help monitor that budget throughout the year. Contact us today for a free consultation.