If you call me or any other business advisor for advice, sometime in that first 30 minutes you are going to express concern about a business outcome and we are going to ask you about the relevant budget.
It’s OK to say you don’t have a budget if you don’t. You are not alone.
Let me try to explain why we are asking.
Budgets are how we compare results to intentions. It’s the Construction Drawings vs As-Builts. We know we can’t change the past, we just want to learn from it.
The fact that you never “needed” them before is admirable. We are still going to recommend them. Here are the three budgets I care about the most:
This your annual budget. Think of it as a Profit & Loss Statement in the future. It takes assumptions about your expected (or intended) revenue and explains how that money will turn into profit (or loss).
It’s a plan, so that means we can change it.
As you move through the year, real revenue happens. Also real expenses. They won’t match your budget. Here’s what you do about it:
1. Identify and explain the variances (that’s very expensive consultant-speak for the things that didn’t happen as planned). Some variances happen for perfectly understandable reasons. Others are what we call “Learning Experiences” or mistakes.
2. If you learned something, use that to fix the budget going forward. The goal is to make the variances smaller and smaller.
3. Listen to the budget. It is telling you to live within your means. When revenue is short, determine if that is an occurrence or a pattern. Was it a timing issue? Or did you just budget too optimistically?
Listen and learn and adjust.
The sales budget determines your revenue for the fiscal budget, but that is just the beginning. Sales Budgets include your entire sales funnel: Wins, losses, and missed opportunities. Sales budgets include margins. Did you get the price you needed or expected?
Some part of your sales resources are not going to yield revenue. Your close rate is not supposed to be 100%. It’s not waste; it’s calculated risk. Did you take good risks?
Should you hire another salesperson? Change the commission structure? Sometimes your marketing (part of the overall Cost of Sales) won’t yield the intended results.
The purpose of the budget is to assess whether the decisions you have made, worked.
Listen, learn, and adjust.
Capital Expenditures Budget
Or as we affectionately call it: CAPEX.
If you have a CAPEX budget, then you can forecast changes in depreciation, cash flow, and margins. It will tell you how your balance sheet will be affected. You can more easily assess the potential results should you consider increasing or decreasing the CAPEX budget.
Of course, you can review whether the investments you have made drove the results you expect.
Listen, learn, and adjust.
Budgets Are Always on Your Side
The point of budgeting isn’t just to have a crutch to say ‘No’. As in, “I’d like to do that but it’s not in the budget.”
Budgeting helps you learn how to say yes more intelligently. As in, “We plugged that into the budget and we like those results.”
And that is a great approach when you have to say ‘No’ too.