Say the word “budget” to a group of people, and you’re likely to get a collective groan or an eye roll. Just the mention of the need to track expenses and scrutinize financial details has the power to kill the buzz in almost any conversation.
But it shouldn’t. The budget should be your business’s foundation, helping you navigate the uncertainty of the present toward stability and growth. It can only play this role, though, when it’s built on accurate information and used to drive financial accountability. In this article, we’ll look at why and how planning for financial accountability—and creating an accurate budget—is so important to building a stronger, more stable business.
A brief history of the business budget
The Chartered Institute of Management Accountants defines a budget as “a quantitative expression of a plan for a defined period of time.” Snore—a little. We like to think of budgets in more exciting terms: as financial roadmaps for your business. They are a tool that helps your company navigate the market, including the unexpected, and measure your performance as you react to it.
Budgets have a long history. In fact, the English word “budget” comes from the Latin bulga, meaning a leather bag or knapsack that was used to carry food supplies. Later, “budget” was expanded to mean not just the sack but also its contents. The roots of our modern-day concept of the budget—as a roadmap for money—can be traced back to England. As early as 1760, the Chancellor of the Exchequer took the national budget to Parliament at the beginning of each fiscal year. The ultimate purpose was to counter the king’s power to levy taxes and control spending. The business budget, though, is a much more recent phenomenon. William Howard Taft was the first US president to lobby for a business budget in 1911. Right on the heels of federal budget adoptions, Donaldson Brown introduced the business budget to Dupont and then to General Motors. For more than a century, the business budget has been the operational and financial bedrock of successful companies.
How to create an accurate business budget
A good business budget is a snapshot in time of the coming year, captured in both anticipated revenue and expenditures. Because business owners and financial leaders are not soothsayers—much as we wish we could be—we don’t have a perfect vision of what the future will bring. This is why a good, solid business budget is refreshed with updated forecasts for revenue and expenses through the year.
The building blocks of an accurate business budget include revenue and expenses as informed by:
- Responsibility. An accurate budget is built on input from those who have responsibility for and influence over a given area of the business.
- Revenue. Consider expected revenue. What sales are likely to repeat? What contracts or projects have already been secured?
- Prospective sales. What prospects are in your sales pipeline? Which are realistic to close? Evaluate against prior year’s close rates—and be realistic because budgets are built on reality, not on what you hope.
- Prior year actuals. Accurate recordkeeping helps you track performance year over year. Consider what happened last year and what conclusions you can draw that may inform this year’s (or next year’s) budget.
- Price increases. The long arm of inflation has touched almost every industry, driving up the cost of raw materials, labor and more. Be sure to consider the reality of current prices and when increases are expected to hit so your budget is prepared to absorb them.
- Sales and marketing. What advertising and promotion activities are underway or planned? How have prior campaigns performed? Turn to the marketing team for accurate inputs and realistic projections.
- Staffing. Labor is one of the largest expenses for most companies. In building next year’s budget, don’t just take this year’s payroll and add 3%. Develop a realistic staffing model that aligns with your business and its growth goals. For example, if you’re operating in the service industry, you know the hours required to staff a given function in your business. Be sure to build them in at the appropriate cost.
- Facility space and leases. Many organizations are rethinking facility footprints after having implemented hybrid and remote staffing models. Where is your planning, and how can it be realistically represented in your budget?
Building financial accountability into the budget
The budget is a useful tool to guide your business through the foreseeable future, but it’s not a finance exercise. It must be grounded in reality. Here are three tips to plan financial accountability into your budget process from the beginning:
- Turn to those with influence. An accurate budget is developed and driven by the people who have influence over its individual components. This means soliciting input from sales, marketing, HR, operations, and more. When you do, accountability is built in, which means a faster reaction and adjustment when you don’t hit the number you’re expecting to.
- Review monthly. Implement a monthly budget review with your senior leadership team. Review the budget column, monthly actuals, and the variance. Dig into those that are unexpected to find out why. This review will help everyone understand where the business is, where revenue or expenses may be ahead or behind, and where you’re headed.
- Ensure format alignment. Make sure that your budget aligns with the format of your financial statements—this makes it easier to review actuals and variance and track performance over time.
Ready to implement a better budgeting process, with financial accountability built in? Consider hiring a fractional CFO. A fractional CFO is a part-time, outsourced CFO who provides strategic financial leadership support to the company—and can implement a robust budget creation and review process to help you build a more stable business.
We can help. Marren Consulting supports privately held businesses with strong financial leadership and accurate, relevant reporting—helping business owners and leaders identify opportunities to improve performance, unlock growth, and achieve their firm’s full potential. Learn more at https://www.marrenconsulting.com.