As 2019 begins, many businesses are finalizing their budget and that means forecasting the future. While there are certain guidelines to follow, a budget gives your company permission to spend and in turn, will accelerate growth in your business.
Identifying How You Prepare
Every business is different. It’s important to understand your Spend Culture to recognize how your organization functions as a whole and building a budget plan that is tailored to your organization’s needs. If you’d like to know which type of Spend Culture your organization has, take the quiz.
When you prepare for your budget, it’s important to consider your revenue growth, headcount, economics, and any expansion or acquisition costs. More formal details to consider include data points your organization focuses on, which ones need to grow, and understanding cash flow or EBITDA growth.
In a recent survey of 20 financial leaders, one of our participants stated how they prepare their budgets for next year.
“I prefer zero-based budgeting, which makes certain that every expense is justified. You must always start a budget based on how much revenue you think you will bring in. That gives you a general idea of how much money you can spend. I like to be exact when it comes to budgeting, I calculate my expected Gross Profit based on prior years and on future year expectations. I have a much better idea of how much my General and Administrative cost need to be in order to break-even. While that is not the goal, it’s important to know that number. If I want to make 10% Net income, then I can easily reverse engineer the operating cost budget.”
To prepare, have the appropriate stakeholders included to have communication between management and the budget committee (if you have one). From there, have preliminary meetings prior to determining the budget plan to ensure all goals and potential issues are discussed and met.
Tools and Resources
Once you’ve understood your organization’s needs, you will need to understand what tools and resources you will need to implement to execute your plan:
From our survey, 45% of participants use an Excel spreadsheet to track their budgets. Why? Well, the benefits to Excel are:
- It’s 100% customizable: you can make reports how you like it based on your own needs.
- It’s great for collaboration between teams: upload your Excel data into Google Sheets and have team members contribute. It’s also easily transferable between computers and systems.
- It’s easy to review: you can easily understand and find the information you’re looking for
However, one of the items Excel lacks is generating presentable reports and automation. For those of you that are in larger firms, implementing a budgeting software may be the road to take. With Procurify, seamlessly track your expenses and purchases to give you insights that you wouldn’t be able to see with an Excel spreadsheet. You’ll be able to see in real-time, what has been spent, and how much you have budget is leftover for the year.
Spreadsheet and Software
Every organization wants to have the best of both worlds: automation and customization of data. Spreadsheets will give you the ability to manipulate your data but a software can help automate your purchasing, accounting, and other aspects of your business. Before you make your decision, see where your organization is going and what your stakeholders are looking to optimize for the year.
Requirement and Challenges
Every organization is going to have budget requirements and face challenges along the way. The goal is to be prepared and mitigate these challenges.
In our survey, we asked participants what requirements they take into consideration when preparing a budget business plan.
“I always make sure to talk with my department heads before I begin prepping the budget. The department heads are a lot closer to the day-to-day operations than I am so a lot of times they are able to provide valuable insights”.
Requirements vary from business to business, and may include EBITDA targets, cash flow growth, expenditure cuts and lowering the time account receivables are outstanding. Before creating your budget, obtain a clear understanding of what the requirements are as a whole organization and individual departments. This will give you an effective place to start the budgeting planning and discussing.
On the other side of the coin are the challenges that are faced with planning for another fiscal year. While it isn’t complete science, there is an artistic component to planning a budget. The goal is to anticipate certain aspects such as expenditures, while still being mindful of bottom line goals.
“The primary challenge is the unknown. With experience & historical trends, you can alleviate some of that challenge. Another challenge is the balance between being aggressive enough vs. being realistic. Setting a budget that is too aggressive quickly deteriorates the results because people throw in the towel”.
The challenge is balancing both aspects of your budgets and ensuring your projected numbers are attainable and realistic, without being too conservative and underwhelming. Finding the balance takes trial and error, so don’t feel defeated when you don’t get it right the first time.
Tips for A Successful Financial Planning
While these are all points and topics to consider when planning and finalizing your businesses numbers, here are few actionable tips to consider for the 2019 year.
- Take time to plan your budget. According to Deloitte, 41.6% take 2-3 months to plan their budgets and 32% take 4-6 months to plan their budget. You can take your time but be effective with your time; make sure that you have the right numbers, data points, and preparing for variable expenses (economics, revenue, sales goals, etc.) that can affect your budget. It’s important to think about all of the possibilities.
- Communication is key. Reach out to department heads, employees, or executives to gain an accurate understanding of what each department needs. Your budget may be subject to change when bumps in the road appear. Avoid this by talking to stakeholders to make sure you’re building a budget plan that works for all parties.
- Be mindful of the process. If you’re working on a budget and numbers seem out of line, test them for accuracy, ensure you stay true to the data, and adjust your budget accordingly (if necessary). For example, if expenditures need to be decreased by 10%, let that remain true for the current years financial planning.
There isn’t a set path on building a budget plan but with the right data points, your business can begin financial planning for the new year with confidence. Ensure you leave enough time to prepare the budget, ask questions, and let the process be as transparent as possible. You may not hit all of your numbers, but that’s why financials are revised year over year.