As one year winds down and another revs up, among your most important tasks is to line up the elements of your business budget. If any of the major items are askew, it could diminish the value of the time you put into the budgeting process and weaken the effectiveness of the budget itself.
Start with the numbers
A good place to start on next year’s budget is with the numbers you put on paper for last year, and your year-to-date results. Begin with your income statement, the first of every budget’s three primary components. Here you’ll see information on sales, margins, operating expenses, and profits or losses.
One specific factor to consider is volume. If sales have slipped noticeably in the preceding year, your profits may be markedly down and regaining that volume should likely play a starring role in your 2014 budget.
The second primary budgetary component is the cash flow statement. It shows you where cash is coming from in terms of daily operations, as well as external financing and investment sources. The statement also tells you where cash is going, as you finance business activities and investments.
Even profitable companies can struggle if their cash flow is weak. Where do they go wrong? Under- or unbudgeted asset purchases can have a major negative budget impact. Another culprit is one or two departments regularly going over budget.
The last primary component of business budgets is the balance sheet. Here you’ll find your company’s assets, liabilities and owner’s equity within the given period. Your balance sheet should give you a good general impression of where your company stands financially.
Take a close look at how your liabilities compare with assets. If your debts are mounting, a good objective for 2014 might be cutting discretionary expenses (such as bonuses or travel costs) or developing a sound refinancing plan.
Review inventory and services
Your financials — where they stood last year and where you might set them going into next year — are important. But there are other elements of your business to consider.
Carrying too much inventory, for example, can devastate a budget as the value of the surplus items drops throughout the year. One fundamental way of making your cash flow statement shine is to minimize inventory so you have just enough to fulfill demand. Doing so:
- Reduces interest and storage costs
- Improves your ability to prevent fraud and theft
- Increases your capacity to track what’s in stock
One item to perhaps budget for here: upgraded inventory tracking and ordering software. Newer applications can help you better forecast demand, minimize overstocking, and even share data with suppliers to improve accuracy and efficiency.
If yours is more of a services-oriented business, you can still apply a similar approach. Check into whether you’re “overstocking” on services that just aren’t adding enough revenue to the bottom line. Keeping infrastructure and, yes, even employees in place that aren’t improving profitability is much like leaving items on the shelves that aren’t selling.
For many companies, a gulf still exists between risk assessment and the budgeting process. Failing to consider major risks could leave you vulnerable to high-impact hits to your budget as these threats materialize.
One type of risk to consider is competitive. If a larger competitor has moved into your market, you may need to allocate more funds for advertising and marketing. Then again, if a long-time rival has closed up shop, you could need to merely boost short-term ad dollars and then channel more money into operations as business picks up.
Another risk is compliance — many business sectors are now subject to increased regulatory oversight. State governments, in particular, are generally more aggressive in their efforts to gather additional revenue. Be it health care benefits, hiring or independent contractor policies, or waste disposal, factor compliance requirements into your budget.
A third type of risk to consider is internal. Although the national economy is far better than it was five or six years ago, fraudsters have plenty of other excuses from which to draw. If this year’s budget suffered from fraud losses, allocating dollars to tightened internal controls will be necessary.
Of course, fraud isn’t the only internal risk to consider. Will your hiring costs rise in 2014 because of anticipated turnover? Will training expenses go up because of a strategic initiative?
Look at the big picture
Perhaps the simplest budgetary question to pose to yourself and your management team is whether next year should be a growth year or one for holding steady or even playing catch-up. From there, your financials, inventory or services, and risk assessments can point the way to a sound, flexible budget.