We here at nperspective believe strongly in the need for businesses, of any size, to develop an operating budget and track their actual results against that budget. Many small and mid-size companies feel that developing a budget is too time-consuming and actual results are never close to budget anyway. A 2018 survey from Clutch indicated that just over 70% of small businesses (1 – 10 employees) did not create a budget in 2018. That number fell to just over 20% for businesses of 10 employees and up. Not a bad result.
My experience has been that even when budgets are created, they are often ignored soon thereafter. Obviously those businesses did not see the value in tracking actual results against the budget, or they threw it together quickly, only out of a sense of obligation. The key is to treat the budget as a valuable tool.
Here is why it is valuable:
- The budget is really a planning tool. If done properly, it forces management to look forward and consider what they expect and/or want to happen. It forces an analysis of what they can accomplish on the revenue side of the business and what it will take in the form of capital, personnel, products and services to meet those revenue goals. If the budget process is done properly, it will challenge management to consider potential obstacles and opportunities, how to allocate their resources and to find ways to make changes for the positive. How are you going to make this happen? What changes or steps will be necessary? Do you need new equipment, a new product, new personnel or a new market?
- Once a budget is in place, you have a tool to measure your goals and performance. This step is essential. You must track actual results against your budget to monitor your progress and identify areas of concern. Why are your supply or communication expenses out of line with your expectations? The sooner you see this variance, the sooner you are able to address it. Without the comparison month to month, you can’t see the trends that can ultimately ruin your performance for the quarter or year. The budget allows you to make informed decisions and react in a timely manner.
- The budget, when properly supported and communicated by upper management, brings focus to the organization as a whole. This may have the biggest impact on your bottom-line than any other benefit. I have seen long established businesses suddenly start growing, both top and bottom line, when they actually start paying attention to the budget and making sure everyone is aware of the goals and tracking it throughout the month and year. A few of my clients are laser-focused on EBITDA return, for example. They make sure everyone in the organization is aware of the goals and they make continuous adjustments along the way to meet those goals. Make obtaining your goal/budget something to celebrate within the organization. Aligning incentives with your goals is often a useful tool to keep employees focused on those goals, but even small things like acknowledgement of certain personnel who made it happen, gathering with cupcakes to deliver operating results or having a prominently displayed results board are often just as useful.
- The budget also helps you identify your cash needs so you have time to plan for those needs and avoid business interruptions. This is best done in conjunction with a cash flow forecast (a topic for another time), but the budget is the starting point for this analysis. Keeping the cash flow aspect in mind, don’t forget your “Budget” not only encompasses your profit and loss results, but also capital investments and loan servicing requirements. These cash requirements also require careful planning.
Don’t ignore this invaluable tool that is often the difference between a bad business, a good business and a great business. We at Nperspective have years of experience in this critical area and would be happy to sit down and discuss how we can help you develop and maintain a productive budget.