Rose Report: Issue 16

Annual Budgets: A GPS for Your Business

Drawing up an annual budget is like creating a financial roadmap for your business—it helps you stay on track and not get lost. And this is the time of year, the fourth quarter, when all businesses should begin to build their budget for next year.

Most importantly, an annual budget manages expectations. It helps everyone in the organization—from department leaders to managers to entry-level staff—understand their goals for the year. Then, through budget-to-actual reports, it allows you to track your progress towards those goals.

Annual budgets also enable organizations to identify problem areas and make adjustments. For example, you might be able to see overspending within certain divisions, and stop it before it derails your budget. Similarly, you could spot underspending and realize that certain worthwhile investments—whether in staff or materials—are not being made. And, according to business magazine Inc, sticking to an annual budget can serve as a stamp of credibility: “Budgets can be instrumental in winning over investors, convincing banks your business is a good loan risk, or bringing on new partners or customers.”

The first step to creating a budget is to take a look at the financial reports of past years on an accrual basis. A business’s financial history can provide the foundation for a realistic future financial plan.

Using this information, the organization then maps out its projected revenue. You’ll want to ask: What role will each of your departments play in accomplishing this revenue target? In order to answer this question, the entire management team needs to be present. Most businesses have several functions—including operations and information technology, sales and marketing, general administration, human resources and recruiting, and research and development—and the heads of each of those departments have different considerations to make with regard to the annual budget. For example, the general administration piece of the budget should address questions about changes in overhead expenses—are you growing and need to lease more office space? The information technology portion of the budget might identify the cost of replacing or upgrading computers, phone systems, or other key equipment.

This year, it’s also particularly important to take a close look at healthcare costs. With the introduction of the Affordable Care Act, all organizations are faced with the possibility of their healthcare costs going up. It would be smart, this year in particular, to involve a benefits broker in your budget discussions who can help evaluate how your benefits can be adjusted to maintain the highest value for employees without significant cost increases.

Given the recent government shutdown, government contractors will also have to build some variability into their budgets. Are their certain functions that could be outsourced so that government contractors can scale up and scale down their operations if another shutdown were to occur?

After each department creates its budget, the senior staff should assess and reconcile these individual budgets to create the overall budget. The end result should be a realistic gross profit target for the year. Every organization, whether a non-profit, government contractor, or large business, needs to budget for a surplus in order to sustain themselves.

With the annual budget in place, the company’s leaders now have a consistent roadmap they can consult to ensure they meet their goals.