Budgeting is the one thing that most owners hate. Many owners hate it so much, they never do it. “I’ll wait till my taxes are done to see how much money I made.” “Sales are going up, must be doing something right.” “Money in the bank, it’s all good.”
If things are going along well, why bother? Why bother going through the mental gymnastics of planning your finances with a budget? For me, that’s the perfect time to plan your finances. Because we have all been in the position of working harder and longer and questioning is it worth it. And often we forget that dollars in the bank is not the only measure of success.
Building a solid budget allows us anticipate issues before they happen and think about ways to avoid them. It helps us answer the question “Is it worth it?”. A budget is a tool to help you focus on your priorities and avoid distraction. It provides a focus for your business.
One of the reasons managers don’t create a budget is because it is hard to look into the future, let alone pull all of the numbers together. Here is a thought process to help you develop a strong budget.
Start with your historical profit and loss statements, hopefully at least 3 years. Break your cost down to a cost per unit value. For a detailed post on how to calculate your per unit cost of production, click here: https://successscorecard.com/2018/02/28/managing-by-the-numbers-per-unit-cost-of-production/. Average the cost per unit for the time period you have and look at the trends per year and what your plans for the next year on before deciding on a good value to use.
The next step is to break the accounts into fixed and variable costs and recreate a yearly budget based upon how much you think you can sell the next year, multiplying the variable costs per unit by your projections and keeping the fixed costs level. With a bit of Excel magic, you can tie all of the variable costs back to one cell that you can change and quickly see what happens to your bottom line when you change your sales projections. I always like to do a good, bad, and ugly scenario because as optimistic humans, we tend to think sales will always go up, a bad assumption all too often.
This process is particularly useful when your business is changing. It gives us a projection tool that helps us answer the question “Is it worth it?” as you take on more responsibilities and work. Take your time, run the numbers and make a good decision based upon numbers.
