Do you have a budget – a real budget? The value of a data-based, dynamic, working budget is often overlooked.
Why every business should have a budget:
- A well-prepared budget illustrates where you are financially, where you need to be to meet your objectives, and identifies the gap between the two.
- A budget facilitates a forward-looking mindset for the business owner.
- Accurate, timely data means you can make solid, fact-based business decisions – both financial and strategic.
- Goals are much more achievable when based on accurate data.
- A budget can help create an environment in which the dog is wagging the tail, not the tail wagging the dog.
- Sticking to your budget reduces the likelihood of impulsive spending.
- A well thought out budget is the foundation of your profit plan.
- A budget provides insight into value drivers that are beneficial to your banker and potential buyers and helps keep your exit plan on track.
- The future is much easier to predict when you create it, based on solid data.
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. But to provide a solid, financial foundation, a budget must be based on historic and current data, compiled from critical financial statements.
Preparing Your Budget
As you are preparing or refining your budget for 2021, be sure to factor in what you have learned from 2020 and the pandemic. With the benefit of hindsight, you know how quickly things can change due to external factors that are out of your control. You should have contingency plans in place, including options for pivoting.
Be sure to factor in your true overhead costs for direct labor. A good rule of thumb is that your labor burden equals approximately 25% of the hourly rate of pay. In addition to wages, include the following:
- Payroll taxes
- Workers compensation
- Healthcare costs
- Other Employee benefits
A budget is dynamic. Therefore, timely financial reporting is essential for maintaining its accuracy and relevance. Receive 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. An investment of the time needed to ensure that your financial reporting is timely and accurate, and to build a budget based on that data, will empower you to be proactive in running your company.
Please contact me if I can be of help in preparing your budget, and to ensure that it reflects your exit strategy and plan.