Budgeting Part Two: Why It Matters

Once the “what” has been established, it’s time to understand the “why” in budgeting. There are two magical things that happen in a business owner’s world in the fourth quarter: holiday sales season and making next year’s budget. Magical to you or not, if you are in business, you need a budget and you need to use it effectively. Budgeting Part One, reminded us of what items are needed, but now it’s time to dive in to the more intricate details of how having a budget will work in your favor and what should be considered as you use it.

Use Your Budget (aka Your Road Map)

You’ve got it in place, now use the roadmap that is your budget to guide you. It is necessary to operate in line with your forecast and measure how your performance is month over month and quarter over quarter. With today’s modern accounting software, the road map doesn’t have to be in the form of boring and confusing spreadsheets. Next year’s numbers can be inputted into Quickbooks online so that you have the ability to compare actual vs. projected as you operate. It is amazing how user friendly modern technology can be when it comes to analysis of financial data. At Accountfully, we use Fathom, which is an interactive tool used to analyze, compare and 

forecast your business numbers. It takes your accounting data and lays it out in a simple 

dashboard, complete with interactive graphs and charts. This allows a not-so-accounting-adept business owner to easily see how their numbers are stacking up and how making certain adjustments will affect future numbers.

What You Are Seeing Each Month

Each month will show you a profit and loss forecast. This will help you understand your profitability - the ability or in-ability to make money. In these numbers are revenue, costs and expenses for each time period. For inventory based businesses, knowing (and planning for) your cost of goods sold will be very important to have accurate projections. As business moves forward each month, you will be able to compare your projections against the actual stats and make adjustments accordingly. For example, how disciplined you need to be in regards to spending, based on any projections surrounding large purchases or slower revenue months, so you don’t get into a cash flow jam.

Considering Cash Balance in Monthly Projections

Speaking of avoiding cash flow jams - how do you account for big chunks of money that need to go out later and not spend it all before you need it? One of the more complicated parts of making an accurate forecast can be harmoniously balancing your cash or balance sheet items to a monthly or quarterly profit and loss statement. This requires considering and showing large chunks of cash or revenue in the monthly breakdown format, so that you aren’t fooled by what seems to be a large amount of cash on hand. For example, when you are buying a lot of inventory, you may have an initial large outflow of cash, then associated sales and costs related to that inventory in later months. To ensure you are considering these items on a monthly basis, it needs to be reconciled to your monthly projections. By applying these large changes month to month, you can stay on track much easier and stress less.

Make Adjustments If Things Are Just Not Working

After operating in line with your new budget, sometimes it just doesn’t jive with how things are panning out. That’s OK. It doesn't necessarily mean you did a terrible job forecasting. If things are in need of a tweak, do so. The major theme in a quality budget is accuracy in reporting financials, so it is best to take steps to have the most finely tuned numbers possible. This doesn’t mean the model should be updated every month on a whim, however. Your budget is still meant to be a static document to measure current performance against, not a guessing game.

Accountfully’s Role In Your Budget

If this is still sounding way too overwhelming to take on by yourself, that is 100% normal. Accountfully is here as your outsourced partner to help you navigate this process. We will take existing and historical financials to understand how we need to best build out your budget when the time comes. We look at all of the “Accounting nerd stuff” - gross profit margin, contribution margin, your expense coding and consider that in forecasting for next year. After you tell us about any savings or expense changes for next year; such as better pricing deals for volume discounts on raw materials, or new employees, we make a game plan. With our interactive and easy to understand tools and resources, it makes it a lot less overwhelming to manage, understand and forecast. Plus, we are here to answer questions.

The good news is, there’s plenty of time left in the year to get started on next year’s budget. If you need some extra assistance on the numbers side, let us know. Tell us about your business, we look forward to talking soon.