The season is upon us….its that time of year you walk into Hobby Lobby and know exactly what time of year it is without need a calendar. When your significant other comes home, you can tell what is on their mind. While it should be a festive atmosphere, it often gets tense after awhile. Yes, it is budgeting season.
This year will be different. There is a new budgeting fad out their your going to try. The budget will be done this year prior to it becoming irrelevant. Oh, the joys of budgeting.
Wait, what is that you say? Your CFO or CPA just stopped in to say they are working on a new financial model. I know what you are thinking…I didn’t like models when I was a kid and I sure as heck don’t like them now.
Yes, it is the time of year that those of us business owners dread just after tax season. Unfortunately, no one really likes budgeting. Most business owners don’t fully understand what a financial model is, much less care. How did it get this way? There has to be a better way, right?
Unfortunately, this is the place most people get to when they think about budgeting and financial modeling. The purpose of this article is not to rehash budgeting and financial modeling philosophies. Rather, it is to hopefully give you a few quick tips on how you might make the process better.
Here are 14 tips and tricks to make your budgeting season better.
- Don’t skip the notes – The notes on the budget are where your strategy comes in. If you are penciling in marketing as 5% of revenue, you’re missing the point. What are you going to do with your marketing this season? What are you going to do THIS YEAR? Document that and write that in your budget.
- Set Realistic Goals – It’s great that your goal is to double your revenue next year while slashing payroll, but that most likely isn’t going to happen. A budget should be a somewhat realistic picture of what you actually expect to happen.
- Define Goals – In order to set realistic goals, you must first define your goals. The goals should lead the direction you want to head, so consider sharing them with employees or incorporating them into the team culture, so that everyone is pulling in the same direction.
- Plan your revenue growth – You budgeted a modest 6% increase in revenue next year. However, how are you going to do that? A price increase, sell more, different marketing plan…luck.
- Too many assumptions – I see financial models that are layered with assumptions. Particularly in startups, it’s difficult to assume anything very far into the future, let alone making accurate assumptions for 20 different factors. Though it may seem beneficial to spend hours planning and calculating every assumption, focus on 5-15 assumptions that you can really hone in on.
- Assuming net income = cash – The flow of net income and cash often don’t match up.
- Not budgeting all of your financial statements – How do you know your net income won’t flow with cash? You won’t until you budget all of your financial statements. Only then will you find out if you are cutting it close on cash.
- Forgetting About Your Taxes – I see more owners than not forget about budgeting their taxes. This is an expense for the business, even if you pay it out of your pocket.
- Starting from the top down – We talk a lot about budgeting for profit. Wouldn’t it be great if you started with a profit percentage in mind and worked towards that percentage? That’s better than just paying yourself what is leftover (assuming something is leftover).
- Starting with a poor foundation – Most budgets start at least with a preliminary analysis of reviewing prior years’ results. This is a great place to start if your financial statements are in good order. If they are a mess, then you are budgeting with bad information.
- Relying on Historical Results – Now to contradict what I just said, don’t rely on historical results too much. While historical data is often, the best indicator we have of seasonality and common trends – overreliance on such data and failure to adapt to industry forecasts and emerging opportunities can cause huge detriment to your business.
- Not tracking budget to actual – Honestly, what happens to most budgets when they are done….nothing. If you’re going to spend so much time creating a budget or financial model, then you should compare your actual numbers to the budgeted numbers on a monthly basis.
- Being a Solo Budgeter – Yes, you are the business owner and at the end of the day, you are the one the budget effects the most. With that said, the more input you get and the more you can share the process, the better budget you will have. Budgeting should be a team process.
- Human Error – I love Excel and build huge spreadsheets (sometimes for fun). However, in reality, there are a ton of mistakes made in excel. While some people may try to sell you on some expensive budgeting software, I think that Excel fits most small businesses. With that said, if something doesn’t look right, investigate it. You don’t want to find out your profit is actually a loss due to a formula error.
Budgeting should be a fun process for owners to go through. During this season, you shouldn’t be stressing anyways. If it isn’t that is often because the owner doesn’t feel confident in the process or their abilities. Utilize your CPA, CFO, or financial professional. At the very least, utilize them in Year 1 so you feel more confident going forward.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected].