Rose Report: Issue 26

Staying on Track with an Annual Budget

issue-26-pic-story3An annual budget serves as a business’ roadmap through the year and manages financial expectations and goals throughout the company. It not only keeps expenses under control, but helps project income, profits and returns on investments. While it’s not required for companies to have a formal annual budget, other than those with government contracts, it is still a best-practice to prepare a budget to manage the business and plan for the upcoming year.

Annual budgets are typically planned in the last quarter of the fiscal year. Ideally, the budget has been examined and adjusted throughout the year, setting up the plan for next year. In the last quarter, your accounting department should examine the previous year’s budget and actual outcomes, and adjust projections for next year.

When preparing the annual budget, it’s important to keep the following in mind.

Create realistic expectations of revenue growth. Take into account the market, the economic outlook, and your previous year’s budget when creating a cost structure to match the growth you expect. While optimism is positive in growing a business, it’s important to be realistic about the actual outcomes and push your team to reach achievable goals.

Check staffing against level of revenue. A realistic revenue growth dictates other costs, such as staffing, so keeping a close-to-accurate budget will guide you when you will need to prepare to hire new staff. It is expensive and risky to hire staff based on unrealistic projections.

Tie cash forecast with the budget. In anticipation of your cash needs, make sure to project the amount of cash necessary to maintain operations before the revenue comes in. Many times billing occurs at the end of the month, but you’ll have costs that occur and must be paid throughout the month. For example, if there’s new business and a new team member hired, that new employee is already on your payroll even if the bill hasn’t been issued and cash hasn’t been received. Plan for at least 45-60 days of cash to cover the expenses.

Be aggressive at the individual level, but conservative at the corporate level. Include managers throughout the firm in the budget planning all the way up to the senior leadership. Operating managers should calculate their divisions projected sales revenues, operating costs, and gross profits. Giving them responsibility to build out their plans motivates them and helps you hold them accountable for meeting those numbers. While it’s smart to encourage them to take reasonable risks from the bottom up, the view from the top down should be more conservative. Setting an overly ambitious goal for the entire company can throw off the planning of each department’s budgets, which may have more trouble reaching the overall goal through the individual limits. It’s essential to have a budget that is achievable and realistic from a corporate perspective.

Communicate results. Once the annual budget is planned, check back on a regular basis—either monthly or quarterly or both—to see if the forecasts were accurately predicted. This helps keep people on track with their goals and sets the scene for next year’s budget. Prepare regular reports illustrating the projections and actual results, analyzing what factors affected the differences in growth, to help individual teams understand what worked in their favor and what should be adjusted.