Planning the blue-sky future for your business can be equal parts exciting and daunting. Now that we are into the first quarter of the new financial year, it may be a good time to take a step back and look forward.
This is especially so if, like many of us, you’re facing an uncertain business environment.
The old cliché is true: if you don’t plan, you plan to fail.
It’s good practice for business owners to regularly ask themselves important questions such as: “What is it that I want from my business?”
This kind of questioning can help avoid major mistakes business owners often make when it comes to budgeting, such as thinking only in terms of spreadsheets, numbers and dollars.
An effective budget is not something you can ignore as just a checklist and a tick-box exercise to make sure your expenses aren’t out of control (though that’s part of it). Nor is it something that should be so incredibly detailed that it becomes over the top and almost unuseable.
The best budgets we’ve seen are the ones that take into account business plans, what that means in expenditure and how that translates to required revenue with some room for blue sky growth.
We see it framed as a “top down” or “bottom down” method, but a great budget is an iterative process. Here’s our guide to effective budgeting steps.
Step 1: Where are you headed?
The budget you’re about to create is a tool to take your business to where you want it to go in the coming financial year.
That might be through a strong growth curve, it might be about maintaining a stable level of revenue, or it might even be winding things down.
A budget, combined with good financial models will help you prepare for uncertainty, and achieve your goals, but you need to know where you’re headed first.
Step 2: Start with what you can control
Your first iteration of your budget will look at the basics starting with your expenditure and then looking at the revenue you need to account for that, taking into account any seasonality.
- Understand your minimum requirements and expenses for the coming 12 months including basics like rent, staff, subscriptions, bills and utilities.
- Review whether you have any upcoming major costs in the next financial year
- Use this opportunity to make a judgement call, review your expenses and see what can be cut.
- What is your projected revenue for each quarter?
- Adjust your revenue across the financial year for seasonality so you get a good sense of what your budget should be.
Step 3: Are you being realistic?
The second step is to review your projected revenue and see if it covers your expenses and delivers on your business goals.
- Is it a realistic projection of revenue? For example, if you will need to grow your business by 50% when you historically haven’t, your budget is likely to lead you into trouble.
- Can you deliver? If you’re aiming high for growth, you need to make sure you’re also making reasonable assumptions within the budget. For example, you may need to add additional staff, or potentially go the other way and bring down expenses.
- Understand what the numbers mean: You will need to understand the changes that might come from growth or downturn in revenue and how to be prepared for that
Step 4: Review, revisit, readjust
As much a budget would be ideal to set and forget, it’s simply not something that can be left untouched. Checking in with your budget and forecasts is needed once a month at minimum.
Especially in times of uncertainty, this monitoring is vital for business owners looking to understand how they are going and where the business is headed, even if the future is hard to predict.
We also practice what we advise, and run this process as a weekly cadence at Ravit Insights to make sure we stay on track. It’s also rewarding to hear that clients use our models to manage their business planning and budgeting on a weekly or, in times of high growth or crisis, a daily basis.