It’s budgeting and forecasting season. Hopefully most small business owners are in the right mindset to set aside some of their valuable time to make sure they properly build out the next year’s goals and expectations before the year wraps up. Start 2015 with a bang and get it done now so you aren't dissapointed later. Knowing your short term financial trajectory is an important asset. Not knowing your 12 month budget or even 3-5 year budget is an unfortunate spot to be in. Utilize your books, your bookkeeper, management team, etc. in order to build out realistic goals that you can hold yourself accountable to. Sure your budget will have variances and will need to be adapted along the way, but that’s to be expected.
Understand Budgets And Forecasts
Budgets tend to be built once and then later used for comparison purposes during that time frame. During the comparison process certain factors may jump out that change the remaining time period of that budget. From these factors, you can react and build a more intelligent forecast for the remaining period. For most of the small businesses we work with, budgets are built annually while forecasts are built anywhere from 2 to 3 to 12 months a year. If you are an individual business owner with only a few dozen transactions a month you may not need to adapt your forecast on a monthly basis while a larger company with multiple locations, several dozen employees, investors, etc., you need to be constantly keep updating these vital numbers.
Adapt Along The Way
No one has a crystal ball and predicting the future is impossible. Expenses sometimes speed up and there is nothing you can do about it. Run rate is a common factor in having to change your budget due to unknown factors. Run rate is the pace at which you are expensing or using your capital. Basically, how fast are you burning through cash? Usually utilities have a predictable run rate since they tend to act in a cyclical pattern, although they seem to always be slightly increasing. However, crazy weather patterns, oil or gas shortages could greatly swing these numbers and these changes are hard to forecast weeks or months out.
Another run rate that might jump out is credit card processing and merchant service fees. However, unlike utilities, this is something you can shop and prevent in the future. Small businesses usually sign up with a credit card processor when they open the doors to their business. The fees can be consistent based on steady revenues but can jump if dollar amounts change or volume changes as the business is experiencing growth. This is where having a savvy bookkeeper comes into play. Those changes need to be noticed right away and stopped. Then use your network or small business’s consultant and find a competitive credit card processing rate that is more consistent and can handle your revenue.
Learn From Mistakes Variances
Differences between budget and actual reports are variances, not mistakes. People tend to get hung up on this and let it slow them down or bring their budgeting process to a halt. When comparing your budget vs. actual reporting look at both dollar amount and percentage point variances. Both can tell important stories. You may not have known that the cost of goods for your restaurant would spike because there was going to be a bacon or coffee shortage 10 months after you built your budget. The lesson learned from this is that you might start reading more about the industry outlook on items relevant to your industry, company, and variable expenses.
If you only look at percentage changes for budget vs. actual you might end up spending time on areas that aren’t worth it. If you see a 1000% increase in the budget vs. actual reporting you might shallow your tongue. But knowing that the dollar amount of that change is only $150 then you can acknowledge it and move on to something more important. Conversely, you might see a decrease in revenue of $20,000 and want to flip a desk over. However, if you are an e-commerce business doing several million a years in revenue than this percentage change may be less than 2%.
The moral of the story is that budget building is a great habit to be in. You can learn from it, adapt and build a forecast and keep chugging along. Once a few cycles of this happens, the understanding and comprehension of YOUR business can go up that much more. It’s an area that intimidates some owners and never gets utilized. That’s where we come in to play. We see over a 100 sets of books a year and build budgets and forecasts for a lot of them. Each budget build has a story to tell and allows for several take aways that an individual business owner may not know about if going it alone. We love that sort of stuff and are here to help.