A budget shouldn’t be something you draft at the beginning of the year, stash away in a drawer, and then compare with your year-end numbers to see how you did. That may sound ludicrous, and that’s because it is. Unfortunately, the way many business owners use their budgets (or don’t use their budgets), is exactly that way. Let’s outline three strategies to improving the creation and use of your budget:
Consider the enabling technology. One of the biggest reasons why people dislike budgeting is because the process is largely undefined and requires them to “create something out of nothing.” Consider working with someone who has a solid foundation in excel, or can help you learn a moderately sophisticated budgeting or planning tool. Automation is your friend. If you work with someone who knows these softwares well, you can start to develop a process that is much easier than having to create a budget from a blank excel spreadsheet, saving you or your team hours and hours of time. After all, a blank excel spreadsheet is one of the most overwhelming places.
Approach the process strategically. As mentioned above, the feeling that you have to create something out of nothing is why most push off budgeting. They don’t like to make guesses that they know are going to turn out invariably wrong. This is why approaching the budgeting process strategically is so critical. Consider focusing first and prioritizing material items. All revenues and costs should be driven by an underlying set of metrics. The first step is to identify all of the underlying drivers and forecast those items. From there you can derive nearly every other item.
Update and Reforecast. One of the most popular entrepreneurial buzzwords is “iterate,” and it applies very much to the process of budgeting. You may have budgeted January horrible wrong, and February might even be far off of budget. That’s ok. The important thing to remember is that by comparing your budgeted performance to your actual performance, you will learn things. So next, the important thing to do is to schedule time to review.
Sit down and write down all of the things you learn as you go through the exercise of understanding what has caused the variances. If they’re positive, how can you repeat them? If they’re negative, what can be done to avoid it becoming a trend?
Now that you’ve reviewed, take what you’ve learned and adjust your original projections. This reforecast is the most up-to-date expectation that you have for how your business will perform for the remainder of your budgeted period. Since it incorporates all the things you’ve learned, it is likely to be that much closer to reality.
Contact us today to learn about the results our clients have seen due to the budgeting processes and technologies that we utilize.