Expert Advice: Budgets
While more than 55% of new year’s resolutions are fitness related (I think it has something to do with the 13 pounds of fudge we all just ate), 80% of those resolutions are long forgotten by February. I say don’t waste your time that. Instead, join the 28% of Americans who plan on making financial resolutions for 2020. Not only is the new year a classic season for self-reflection and goal-making, you can use many year-end resources to review the past year and make a smart plan for your business for the new year. One of the best tools for improving financial performance is budget.
1. Examine prior year’s performance.
The first step in the budgeting process is examining the past year’s financial performance. And when I say examine, I don’t mean just hopping on the scale and looking in the mirror. I’m talking blood tests, x-rays—a thorough and complete exam. This can be done by exporting a general ledger report from your accounting system and reviewing transactions for the previous year. During this review, we are looking for transactions that are coded to incorrect accounts and need to be reclassified, expenses that are no longer necessary, and trends and seasonal variations in revenues and expenses.
2. Search for trends.
Once we’ve examined the detail and scrubbed our data, we can zoom out to the financial statement level. At this higher level, we can analyze 2-3 years of activity in search of trends and cause-and-effect relationships in our business’s financials.
3. Allocate resources in an annual budget based on input and goals.
Now that we have a good handle on our history (the good and the bad), we can start developing our budget/plan for the upcoming year. It is important to include all key personnel who will be responsible for executing the plan and adhering to the budget in the decision-making process.
Key revenue decisions to be made in the budgeting process include what products or services are the focus for the upcoming year, which markets and/or customer segments represent the greatest opportunity for growth and success, and when is the best time to pursue these growth areas. Budgeting expenses is simply the process of allocating resources in the most efficient manner to achieve the revenue goals.
4. Track and evaluate performance.
The budget doesn’t stop with just setting performance goals. Management must evaluate and compare the actual performance with the expected performance periodically (typically monthly) to see how close the company is to achieving its goals. If certain areas aren’t on track, it is important to adjust and adapt so the company can achieve its goals.
