When planning next year’s budget, look to the future and never dwell on the past.
Good strategy requires good numbers—it’s just that simple. It’s impossible to look at the big picture without making reasonable assumptions about where, how, and when cash will be coming in, and where, how, and when cash will be required. That’s why it’s essential to set an annual budget for your business.
When setting a budget for your upcoming fiscal year, do you fall into one of the categories below?
- Your budget process is quite simple…
Do you take your actual results from last year and add or subtract a percentage point or so, depending on the marketplace and the current economy?
- Your budget process is based on industry info you heard at a conference…
Do you tweak your prior year’s results to create the budget based on how you believe your new intel will affect sales and profit.
- Your budget is your primary business-management too…
Do you start your annual budget process with a blank slate. Then, after receiving a detailed sales forecast based on your sales department’s pipeline, you carefully build cost estimates?
Most business owners believe they can’t accurately predict next year’s performance. As a result, they prepare a budget based almost solely on the prior year—like the hit movie Groundhog Day, in which the same day is repeated over and over again. Sometimes these important financial decisions are not based on any data at all.
As the computer HAL said to the interviewer in Stanley Kubrick’s ground-breaking film 2001: A Space Odyssey: “My mission and responsibilities range over the entire operation of the ship. I’m putting myself to the fullest possible use, which is what any conscious entity can ever hope to do.”
Like the solo computer HAL managing the ship for the greater good of the company, the performance of most businesses is far too closely linked to the performance of the owner rather than that of a team executing a detailed game plan.
All owners have good intentions when they make decisions to try and steer the ship of their company’s future goals. But, when figuring out a sound budget, it’s extremely important to work together with other fiscal-minded employees within your company (CFO, accountant, analysts, etc.)
A good budget is a cornerstone of your strategic plan, it clarifies your business levers, enforces accountability, and allows you to establish objectives targets for the future. Every major strategic business decision—staffing levels, capital expenditures, new products or new markets, response to competition—requires consideration of available cash or capital. Without a well-conceived budget, it becomes very difficult to be truly strategic.
Accurately predicting the future—like 2001: A Space Odyssey—can be accomplished if you’re willing to spend time to understand your products’ place in the market, your company’s future performance, as well as the current and future business environment.
Regardless if your business is big or small—Burke and Schindler can help you learn how to maximize your value and help create the perfect budget for your upcoming year.