Budgeting Part One: What You Need

In the business world, the end of the year (or Q-4) is the time to reset, reassess and plan for next year. This is the key time to create or update a budget for next year. It may seem overwhelming to think through all of the pieces involved in making a budget; what you think you spend, what you should spend, what you think you will make, but it doesn’t have to be. Let us help simplify things for you in a two part series that will layout what needs to be done and why it needs to be done. Let’s dive in to the “what” parts, so you can get started: what you need and what feeds the accurate forecast for next year.

You Need A Budget (And Up To Date Financials)

Your budget is one of the core, professional pieces of running a business and it is similar to a road map. If you have been tracking things properly from the beginning (i.e., know where you have been), chances are you have all of the basic data ready for you to assess and draw from to know where you need to go. Your first step is to start from accurate numbers stemming from current and previous operations. Hint: you will not be doing yourself any favors by guessing these numbers.

If Accountfully is at the helm, you already have the up to date financials and detailed reports that make forecasting so much easier. You also have the guidance and support in making future models. Failing that, online accounting software will have simple reporting tools to show you all of the basics - what came in and what went out - all categorized by each account. This works best, of course, if you did a good job reporting by defining your chart of accounts and keeping things meticulously updated. For a refresher on the ins and outs of reporting, read our article here. This will layout the basics when it comes to what you should be tracking, understanding and organizing.

Keep It Simple

If you are already feeling overwhelmed by the concept of making a budget, the best plan is to not overachieve. A one year, monthly format is best to work with. Unless you are seeking funding, outside investment, or have investors that need to see far ahead, you don’t need to get crazy trying to forecast three to five years out. Chances are, it won’t be super accurate, unless you have an intense, unwavering strategic plan … and a crystal ball. For general internal management of your business, keep it simple. What you are trying to get a sense of is the best (realistic) case scenario for inflow and outflow so you can match up business operations reality to stay inline with your goals as you go.

Consider FutureExpenses and Revenue In Your Plan

Forecast next year’s expenses in a realistic fashion. A good starting point is people investment. Are you hiring new people? Bumping up salaries of existing ones? If you are taking on additional expenditures, map out and plan the timing of these additions, so that the extra expense can be inline with greater cash in-flow months. Calculate out realistic numbers involved in your natural revenue changes.

Speaking of cash flow, this is another big consideration, in addition to inventory planning. For businesses that hold inventory or need raw materials, this makes cash flow more pivotal when it comes to month to month operations. Map out big purchases and forecast increased sales once inventory is made available. If you know there is a large inventory or supply payment needed 90 days before the associated sales, consider that big chunk of cash headed out the door in that month over time. You can get a sense of timing from inventory purchase to sale from previous months or years.

Debt payments should be considered and forecasted as well, since this may tie in with large inventory purchases. Many businesses use a line of credit to buy inventory. Make sure you are planning for paying that back once sales of that inventory start to hit. If you are getting better pricing from vendors, or have increases in expenses, these changes in percentages will also need to be considered in next year’s projections.

Closing Thoughts For Your Next Steps

Let’s not get too crazy obsessing over the “what” portion of budgeting. Start by ensuring you have true, accurate data from previous years and current months. That is where your time is first needed to start modeling for next year. Once you have that piece, you can start analyzing and forecasting what things should look like for next year.

In Budgeting Part Two, we will dive in to the more complex pieces involved in developing and operating inline with your budget, and how it will need to play in to monthly and quarterly decision making.

Seem overwhelming still? Not sure you can forecast the right numbers, or have the current ones in check? It’s OK, we can help. Tell us how you are feeling as it comes to next year’s plan. If you need help in the reconciliation (aka turning the crumpled receipts and unrecorded items into data), Accountfully has your back there too. The first step to a better budgeting world is a simple form (linked below), e-mail or phone call.