It’s an essential element of business: preparing an annual budget enables you to evaluate your spending, anticipate future needs, and stay on top of profits and cash flow. It is also a time-consuming task that many business owners dread and postpone. The value of a data-based, dynamic, working budget can mean the difference in whether you succeed in your business, or just stay afloat.
Every business should have a budget. Here’s why:
- A well-prepared budget demonstrates where you stand financially, where you need to be to meet your objectives, and identifies the gap between the two points.
- A budget enables a forward-looking mindset for the business owner.
- Accurate, timely data facilitates solid, fact-based business decisions – both financial and strategic.
- Goals are far more achievable when based on accurate data.
- Impulsive spending is less likely when you have a well-prepared budget.
- A well thought out budget provides a foundation for your profit plan.
- Insight into value drivers that are beneficial to your banker and potential buyers is within your budget.
- Budgeting keeps your exit plan on track.
Business owners may throw together a general budget based on what they THINK is true and rely on it to make financial and operational decisions. Revising your approach, however, can pay dividends and create a solid financial foundation that is based on both historic and current data, compiled from critical financial statements.
Preparing Your Budget
Whether you are just starting your annual budget, or refining it, begin by reviewing what you experienced and learned from the past year. With the benefit of hindsight, we know that circumstances and the business climate can change quickly, due to external influences that are beyond our control. You should therefore have contingency plans in place, including options for pivoting. Project for the entire year but factor in the near term, maintaining the flexibility to adjust as circumstances change.
A vital component of budget preparation is determining your true overhead costs for direct labor. A good rule of thumb is that labor burden equates to approximately 25% of the hourly rate of pay. In addition to wages, include the following:
- Payroll taxes
- Workers’ compensation
- Healthcare costs
- Other employee benefits
Like your business activities, a budget is dynamic. Therefore, timely financial reporting is essential for maintaining its accuracy and relevance. Schedule receipt of your financial statements at the same time each month to maintain consistency as you compare the current month to previous ones, and to produce precise projections. If you lack confidence in the accuracy of the reporting, review your accounting processes and work with your CPA to identify data you may be missing.
Budgeting is a time-tested management tool that is foundational to making the best decisions for your business. The time you invest to ensure your financial reporting is timely and accurate, and to build a budget based on that data, puts you in control, and will empower you to run your company confidently and proactively.
Build your company’s future based on solid data. Please contact me if I can be of help in preparing your budget and ensuring that it reflects both your current business strategy and your exit plan.