Most companies don’t use budgets to help meet profit goals. Why? Well, most owners and CEOs reason that the effort required to learn how to build and use workable budgets is just too much. They seem to feel that learning how to budget is more frustrating than just hoping the numbers will all work out — if they only sell enough widgets or services or whatever. The fact is, however, that budgeting is the most effective way to consistently meet profit targets and avoid costly surprises. Budgeting helps you invest your resources to your company’s best advantage — based on careful consideration, rather than the urgency to make some kind of move today. Owners and CEOs need to begin controlling the bottom line with some of the same tools they use to control the top line, and budgeting is the first step. Consider these eight tips to help you become a better budgeter:
1. Take the time to do it right. A budget is not a sales forecast you put together on the weekend to impress your banker. It must be the result of coordinated input and effort by you and your top management team. That makes budgeting a project that requires some time and thought, just like any other project your company takes on.
2. Practice, practice, practice. Regardless of how tough it may be to estimate the future, your forecasting accuracy will improve, and you’ll be better able to control the results, if you actively use a budget. Practice does make (almost) perfect.
3. Don’t think your company is the exception. Any business can be budgeted. The only question is how much practice it takes to strike a balance between the time invested and your forecasting accuracy. Remember that a startup business has to be forecasted and budgeted in order to get financial backing. This includes companies trying to do something that’s never been done before.
4. Use a Gantt chart. This is an expanded timeline to track deliverable dates for budget completion. It will tell you if you’ve scheduled too much to be completed in too short a time given other business activities that also require your team’s participation.
5. Don’t try to budget to the last penny. Predicting exact results down to the penny is not the objective. Rather, budgeting is more about giving your employees a direction to use for course corrections at a level of detail where it matters. If you try to forecast every last expense, regardless of how small, the details will drive you crazy.
6. Make the trade-offs when necessary. You have finite resources available to you. If you must spend money for something you didn’t budget, decide what budgeted expenses can be removed to “finance” the new item. Without this discipline, you will almost always overspend — because there always are good reasons to spend money. They don’t always produce more profit, however.
7. Set both profit and cash flow targets. These two measures are very different and require different kinds of measurement and monitoring to prevent unpleasant surprises. Don’t believe me? Keep in mind that every year businesses with great profits fail due to a lack of cash.
8. Ask three questions to analyze the results. With budget comparisons in hand, ask your team these three
questions at the end of every month:
1) How are we doing compared to the budget? If results differ from the plan, why did this happen?
2) What must we do now to have a better result next month? How can we keep the positive differences and avoid more of the negative ones?
3) What are we learning that will help make next year’s budget better?
By following these tips, your income statement will be more informative, your bottom line more appealing and your peace of mind more comforting.