It’s budget time again for Alliance Bank, and I imagine it’s the same for many of you. Every business does their budget a little differently, and in a past blog, we discussed the importance of stress testing your budget. For this post, I’d like to share a few approaches to budgeting and business planning that you could use in preparing the 2019 budget for your business.
STEADY AS SHE GOES
A very common and conservative style of budgeting. You simply look at past year’s budget and make note of how you’ve been able to grow, cut expenses, or just stay where you are. This gives you a good idea of where you’ve been before, where you can realistically go next year, and the methods that have gotten you there before. Then you prepare next year’s budget to continue operating within a business style that makes you comfortable and that has made you successful. It’s a good strategy. There is absolutely nothing wrong with budgeting for slow and steady growth, or even to just maintain your business position. This could be a solid budgeting style for your business if you’re not planning on changing anything significantly over the next year, considering just adding a few new clients and/or expanding some of your existing relationships.
A YEAR OF CHANGE
Got big plans for next year? Rolling out a new product, opening a new location, adding a salesperson, or even launching a new marketing campaign? If so, your budget should reflect these anticipated changes and the uncertainty (in both revenue and expenses) that they can bring to your business. When you began planning these changes, you likely ran some kind of pro-forma which projected an expected outcome from the changes. You should be able to just incorporate those pro-forma numbers into your budget. On the other hand, if you haven’t put a pro-forma together, now is the time to try and assess what impact it will have on your budget. Base your projections on the results of similar changes you’ve made in the past. For example, if you’re going to roll out a new product, and you have introduced new products before, you should have some base assumptions you can make and historical numbers to form a baseline. If this will be the first time you are rolling out a new product, and you have no previous data to base projections on, do some industry research and see how other companies have made similar changes. Sometimes, you can even find the budgets and projections they used, including the end results.
This is the opposite direction of the previous two methods. Instead of assessing your operations for the upcoming year and then projecting the resulting revenue, in this style of budgeting, you set the revenue goal and then determine how to achieve that goal. For example, you set the bar by declaring “I want to grow my business’s bottom line by 10%,” (for managers, you might receive such a mandate from upper management). So now you have to figure out how exactly you’re going to reach that goal. In essence, this style involves budgeting resources to reach a financial goal, as opposed to budgeting/projecting finances based on your existing resources.
However you prefer to do it, budgeting is a very useful business tool. Not only does it force you to consider the big picture of your business, but it gives you an excuse to really analyze your business and assess your goals. You might be surprised at the things you uncover during your budgeting process. You may see new opportunities or choose to take/avoid risks based on the numbers you are looking at.
If you don’t know where to start your budgeting process, hit me up. I love that geeky side of business and would love to help you start the habit of annual budgeting.