Entrepreneur's Corner: Budgeting for Success
By Curt Nelson, CEO, Entrepreneurial Development Center
Just like a complete business plan allows you to project actions and reactions into the future, proper budgeting allows the projection of the financial requirements, responsibilities, and outcomes needed to drive success. Just like personal finances, unless you have more income than you can spend, if you don’t budget, and don’t manage to that budget, you will get into trouble. Your business is no different. Quality businesses update their business plans and related budgets annually. Creating quality budgets for the upcoming year requires a disciplined process and complete team acceptance. Do not simply add on to your past budget. Take the approach commonly called “zero-based budgeting.” Build your budgets from scratch including only what is necessary to accomplish your plan. Far too many businesses carry old programs and their related expenses forward, all of which are not needed, driving up their operating costs and wasting critical cash resources.
I recommend the following budgeting process:
- First update the business plan, including all strategies.
- To establish your revenue goals, present your updated product, pricing, advertising, promotion, and support strategies to your sales leadership.
- Get your sales leadership and organization to create a projected sales forecast, by product and by month, which is based upon your strategies. You should be very careful that the sales organization drives the forecasting process so that they are fully engaged in attaining the number. If you impose a projection, they will not “own it” and you will not achieve it.
- Work with the sales organization to arrive at a number that works for both the business and the sales organization.
- Once you have finalized the sales forecast and marketing strategies, you can then ask your operations teams to create their projected budgets, based upon attaining the forecasted revenue, products, and timing. Like the sales organization, you want individual, operational departments to arrive at their own initial budgets, again creating buy-in and ownership.
- Once you have all the departmental budgets, you can then compile the projected income statements and view the results. Clearly some adjusting will be necessary. If the budget does not roll up to a workable model, do not simply change a single line item to make it look better. Go back to each department leader and build a revised plan. If you involve the entire team in the process, you will arrive at a budget that everyone owns, making goals much easier to attain.
- Once you have a final, projected income statement, you can generate the cash-flow statement and balance sheet.
The budget process generally takes several weeks; I have traditionally started the process in October of each year with the goal to be complete by the middle of November, allowing proper time to begin timely execution for the following year. If you create a quality budget, monitor your performance to the budget on a monthly basis, and make needed adjustments as your actual versus budget performance “talks to you,” your business results will improve and “surprises” will be reduced.