Don’t be one of the 80% of small businesses that fail due to cash flow problems.  It’s the right time of the year to get a budget in place that can help you steer your company away from cashflow problems and towards increased profitability.

Many clients find preparing the annual budget a daunting process. Yet it is an important component of financial success. Budgets allows business leaders to control overspending in less productive activities and allocate more funds and resources into more profitable areas.

Here is a top 5 checklist to keep in mind when budgeting:

1. Set a reaching, yet realistic goals

2. Establish the baseline run rate of the business without new growth

3. Layer on Net New Sales & it’s associated costs

4. Model the impact of Fixed vs. Variable Costs

5. Remember that budgets are fluid and not static

1. Set a reaching, yet realistic goal

Businesses need to grow or this old adage may come to pass: “If you aren’t growing, you’re dying”. Financial goals should be motivating and help inspire teams to work hard. They should also be realistic since too lofty goals can be demoralizing for an organization if they are too far out of reach and not met. Setting goals for an organization can bring a team together as everyone works hard to achieve a common goal. And also who doesn’t want to grow and make more money?

2. Establish the baseline run rate of the business without new growth

Before planning for all the potential new growth, it is important to understanding where your business stands today from a run rate basis. This involves analyzing historical trends and incorporating the impact of any changes that have already occurred, but not yet realized in the financials. Also, a common pitfall is assuming a certain margin based on historical averages without anticipating any potential increases in costs, especially labor and cost of goods sold.

3. Layer on Net New Sales & it’s associated costs

Once the baseline of the business is set, layer on net new sales that are needed to achieve your high-level goals. Net new means to include any lost customers that potentially may leave based on historical attrition rates, which is a common omission in budgets. Also, it’s important to include the cost of acquiring new customers or the cost required to win these new customers. It’s common to forget to include this cost, but as we all know acquiring new customers usually isn’t for free.

4. Model the Impact of Fixed vs. Variable Costs

When sales increase or decrease, not all costs move proportionately with revenue. It’s easy to assume that costs may grow as a fixed percentage of revenue, but not all costs are variable like that. Not properly accounting for this impact could be devastating for a business especially when sales decrease and fixed costs don’t. Also, most fixed costs are fixed only at a certain level and when sales hit a different level, additional investment of fixed costs is usually needed to support the growth like buying more equipment.

5. Remember that budgets are fluid and not static

The only certainty of forecasts is that they will never be accurate. As such, organizations need to adapt to changing environments and unexpected outcomes. Businesses can still reach their overall financial goals, but it may be achieved in areas not originally planned. For example, one department may need to reduce their spend in order make up for higher than expected costs from another department.  This requires constant monitoring of financial activity and comparing results to your budget.

 

Budgets can help businesses grow. CoEfficient Services can assist you with budgeting and forecasting, to help reach your financial goals.

Our team of highly-experienced accountants and financial experts works with you to design and prepare a comprehensive annual budget. Using a top-down approach, we can take your high-level financial targets and integrate them into a bottoms-up predictive analytical model based on historical data to create a detailed budget. And then throughout the year we provide detailed reports with variance analysis to monitor performance. (See link for example dashboard)

Reach out to CoEfficient Services today to start receiving the comprehensive budgeting services that will help you plan realistically for the future, make informed data-driven decisions and grow your business.

Email us at info@coefficientservices.com for more information.