As we step into Q4, it’s time once again to start planning for next year. One of the key components to strategic planning activities is preparing your budget. While it can seem like a time-consuming task, preparing an annual budget enables you to evaluate your spending, anticipate future needs, and stay on top of profits and cash flow. A well-prepared budget is an essential element of business that demonstrates where you stand financially, where you need to be to meet your objectives, and identifies the gap between the two points.
It’s often tempting to throw together a general budget based on what you THINK is true, rather than diving into the actual numbers. This practice makes financial and operational decision-making misinformed and unreliable. Revising your approach, however, can pay substantial dividends and create a solid financial foundation that is based on both historic and current data, compiled from critical financial statements.
A data-based, dynamic, working budget can mean the difference in whether you succeed in your business, or just stay afloat. It provides for a number of insights:
- Enables a forward-looking mindset for the business owner
- Facilitates solid, fact-based, business decisions – both financial and strategic
- Increases the likelihood that goals will be met
- Decreases impulsive spending
- Provides a foundation for your profit plan
- Keeps your exit plan on track
Preparing Your Budget
The process begins 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. It’s especially important during periods of change and unpredictability. 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.