Are You Prepared for Budget Season?
As we approach the middle of summer, and the end of Q2 for many businesses, it’s time to take a serious look at what 2025 will have in store for you! If you haven’t already started thinking about your budget for next year, this is your sign to begin planning. It is never too early to begin the process of budget creation, because the more time you have to review and revise, the more useful your budget will be.
A company’s budget is their roadmap to success. And if you haven’t done your due diligence to ensure it is the most accurate, realistic, and strategically sound plan it can be, you may be setting yourself up for disappointment, frustration, and even failure.
Below, I have outlined the key steps to the budget creation process. Whether you already have a proven method for budget building, or you’ll be going through this process for the first time, reviewing the steps below will ensure you have a solid understanding of what is important and why as you look to the future!
Establish Clear Financial Goals
Establishing clear financial goals is essential for the success of any business. By clearly defining what you want to achieve financially, you can create a budget that aligns with your objectives. Whether it's increasing revenue, reducing expenses, or saving for future investments, having clear financial goals provides direction and focus for your budgeting efforts.
When setting financial goals, it's important to make them specific, measurable, attainable, relevant, and time-bound (SMART). This ensures that your goals are realistic and achievable within a certain timeframe. By establishing clear financial goals, you can track your progress and make necessary adjustments to your budget along the way.
If your company or organization doesn’t already have a clear strategic plan, or perhaps the one you’re following is outdated or irrelevant, then getting up to date with goals is your number one priority at this time. Keep in mind that you should be regularly re-visiting your strategic plan to ensure you stay relavent and on track.
Track Expenses in a Timely Fashion
This one might seem like a no brainer, but it is shocking how many businesses aren’t tracking expenses regularly and accurately, or aren’t reviewing financials with their whole leadership team on a regular basis. Tracking expenses regularly is a crucial part of effective budgeting. Regular, in-depth reviews of your monthly financials are a must for all businesses, and are especially helpful when working on a forecast or future year budget. By consistently monitoring your business expenses, you can identify areas where you may be overspending or where you can make cost-saving changes which can be worked into next year’s budget. If you aren’t actively considering your 2025 budget when you do monthly financial reviews, then you likely aren’t going to remember many of the nuanced adjustments you’d like to make.
Particularly as you prepare now for the close of Q2 numbers, take the extra time to ensure the data you have is accurate and complete. And once the numbers are in, really focus on analyzing costs as well as sales, and begin taking notes on the adjustments that might be necessary for next year’s budget.
Start with Two Budgets
You don’t necessarily need to begin with two seperate budget files, but you should definitely start the process with two budget summary sheets. The first budget summary will be your best case scenario, including all the pipe dreams, and everyone’s highest goals and expectations coming to fruition. This is where you get to really have fun and imagine what the possibilities could be if everything works out in the very best fashion. The second will be the polar opposite of that, and will reflect a much more pessimistic view of the year. The obvious worst case scenario for any business would be ceasing operations, in which case your budget would be pretty simple - zeros all the way down. But for the sake of this exercise, you don’t need to go that extreme. Your worst case scenario budget would simply reflect what business would look like if none of your goals were achieved, but you still had a base level of revenue. While I am an optimist by nature, and I don’t care to dwell too long on the negative things that could happen, this is a necessary part of ensuring you end up with the most realistic final budget once all your data is in.
After you’ve gone through the whole process, your final budget will fall somewhere on the spectrum between those two. While every business and every industry has its own level of uncertainty, if you’re doing it right, the final version’s net income will typically fall somewhere just slightly on the optimistic side of the average of those two numbers.
Once you have made a good first pass at both scenarios, you can create a third sheet where you will begin to record, line by line and month by month, your confidence level between the two extremes. Your final level of confidence in each line will ultimately end up being reflected as your final. budget number.
As a rule of thumb, revenue budget numbers should lean more toward the conservative side, and expenses should be slightly more generous. This is particularly relevant where there is a high level of uncertainty, such as for purchases where you pay a market value with high levels of fluctuation, or where you don’t have a contracted rate.
Seek Input for All Relevant Parties
It is important that you use all of the data available to you as you work you way line by line through each of your budget categories. This includes the feedback and opinions of stakeholders, employees, company leadership, customers, vendors, as well as trends in the general market.
Right now, as you are planning your approach to the budget process, make a list of all the key contributors that will be valuable in some way to building your most accurate and realistic budget. Some important contributors will be:
Your accountant, CFO, Accounting Manager, or whoever is most knowledgeable on your historical numbers
Sales reps and sales leaders who are in consistent direct contact with your customers
All department heads or managers who have purchasing authority for the organization. Ensure that anyone who will be making purchases in the coming year has had the opportunity to give input into the process. Depending on the size of your organization, this can be as simple or as extensive as you deem appropriate. Just make sure these individuals are considered in the process.
Review and Adjust Budget as Needed
A budget is not a set-it-and-forget-it tool. It's important to regularly review and adjust your budget as needed to ensure that it remains effective and aligned with your business goals.
Schedule regular budget reviews, whether it's monthly, quarterly, or annually. During these reviews, compare your actual financial performance against your budgeted amounts. Identify any variances and analyze the reasons behind them. Were there unexpected expenses? Did you achieve higher sales than anticipated?
Based on your findings, make necessary adjustments to your budget. This could involve reallocating funds to different expense categories, revising revenue projections, or implementing cost-saving measures.
Remember, your budget should be flexible and adaptable to changes in your business environment. By regularly reviewing and adjusting your budget, you can ensure that it remains a valuable tool for financial management and business success.
