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One of the biggest hurdles a small business owner has to overcome is understanding their financial picture. As your company grows, your finances get exponentially more complicated. So do the risks associated with not understanding the way cash moves through your company: not having enough cash is the #1 reason companies close their doors.
The most basic of business forecasting tools is the annual budget. Done right, it can give you a baseline for future prediction and help you make better decisions, and even reveal flaws in your business model.
But most entrepreneurs don’t leverage their budget as well as they could. If the annual budget is put together at all, it’s often reviewed, approved, and then left to languish for the rest of the year in an untouched Google Drive folder.
That’s because a company budget is seen as a box to check instead of a living document that drives smart, intentional entrepreneurial thinking.
Here are 6 ways to actually use your budget on an ongoing basis:
(1) Reforecast the year. The annual budget itself is a fixed document, a snapshot of your predictive abilities at a certain moment in time (ideally November 1st of the previous year, when your budget is completed and signed off on). But if you compare your company’s actual performance to your budget each month, you may decide to reforecast future months accordingly. Some business owners like to reforecast every single month based on actual numbers while others prefer to reforecast once per quarter. That updated information ensures that your picture of the future is as accurate as possible.
(2) Set sales targets. When you identify annual and quarterly revenue targets, look to your budget as the baseline. You may choose to set more aggressive targets (your budget should err slightly on the conservative side), but the budget numbers will give you a floor and ensure your team sets realistic expectations.
(3) Identify unnecessary overhead. Repetition encourages action. If you’re forced to revisit your expenses every single month, you’ll eventually notice places where you could make cuts or adjustments to improve the bottom line.
(4) Plan for key hires. How do you know when you can afford your next team member? Ballpark their salary and revisit your budget to see when you’ll be able to bear the additional expense. Yes, there’s a bit of a dance here: new team members can open up additional capacity to increase revenue further, but you want to be confident you’ll be able to make payroll before you bring on that new hire.
(5) Identify blind spots. Your budget might help you identify an issue with your business model (i.e. low GP) or a problem with how owner compensation is allocated within the company (check out this excerpt from Simple Numbersfor some quick insight into owner’s comp).
(6) Look ahead. You ideally want a fully built out 3 year budget to truly allow you to look ahead. This picture of the future can give you the data you need to project and work toward major growth—which you have to start seeding now.
One of the biggest reasons an entrepreneur doesn’t use their budget well is that they need help understanding what their budget can tell them. Their finance seat doesn’t extend beyond basic bookkeeping functions and a CPA who helps pay their taxes. If that’s your situation, we may be able to help.
We’ve got a Finance Services team that can assist you on a fractional basis. Whether we own your full finance function or just provide a few hours per month of reporting and analysis, we can help you understand your numbers and take control of your business. Contact us today to learn more.