For most businesses, it’s that time of year— leadership reviewing, reflecting, adjusting and evaluating business activities that impact the organization’s financial status.
For many, this may be the most stressful time of year, digging deep into the company’s numbers. Did we make or exceed the goal? If not, what’s the impact on the business going forward. How do we increase revenue, improve our profit margin, shrink costs? What strategies will we implement that positively impact our financial status? Vexing questions about following year salaries, bonuses, incentive compensation, new personnel hires all surface and require thoughtful consideration and decisions.
Budgeting is a crucial discipline to any size business, yet Lisa and I see so many small and even some medium-sized businesses avoiding this essential planning process. The burden ends up in the bookkeeper or accountant’s lap who is never involved in developing the organization’s annual plan, goals, and strategies. Lacking this, a business will never achieve the sustainability and growth it otherwise could. Business owners don’t have to be accountants to know their numbers, but they should know basic budgeting, financial forecasting, variance, and trend analysis. These skills quickly learned are necessary to build an organizational foundation of knowledge about the business.
Strategic thinking and execution planning is another discipline that creates exponential growth. The discipline has five specific focus areas: strategy, business development, people, execution and mission. Knowing your numbers falls under the execution discipline. Like any other plan, a budget is how you see your business’s money operating over a year. Revenue, cost of goods sold, gross profit, fixed and variable costs, net profit are estimated by month based on history and projected future inputs and outputs. It considers your business cycles and strategies developed to achieve SMARTER goals, specific, measurable, attainable, results-oriented, encouraging, and rewarding. In total, these goals make up your annual business plan, and your budget is what resources it. It’s not magic, and it’s a very deliberate, integrative process that requires at a minimum monthly review of how cash is working in your business.
However, we encourage you to go one more step, and that’s to develop an out-year forecast. The budget is for the year your executing; the forecast is for the year to come. This forecast significantly enhances the strategic thinking and execution planning process. Every business should be looking out beyond one year if you genuinely have an ongoing business and not a hobby. If so, think eighteen months out every time you review your financial plan. Ask yourself how what I do today will impact my financial status eighteen and even twenty-four months from now. You can’t do that unless you develop a meaningful forecast that covers those additional months. So, in this last quarter, we recommend you finalize your 2022 operating budget and create a 2023 financial forecast. Doing this only makes sense. Many of the goals you pursue today mature and have the most impact on your financial status well beyond the budget year.
Now that you have a budget and financial forecast, further, develop the process by instituting monthly reviews comparing actual financial performance against budgeted and forecasted performance. Assess your strategies’ impact and the achievement of the goals outlined in your annual plan by determining the positive and negative variances between planned and actual outcomes. The more you and your leadership team understand the trends, ebbs, and flows of cash into and out of your business, the greater the fidelity in your decision-making. And frankly, any decision you make regarding activities related to your business, whether employee compensation, marketing pursuits, facility expansion, and the like, should never be entertained without determining the impact on your budget and financial forecast.
Numbers, numbers, numbers! Don’t be intimidated by them. Understand your numbers and control them. Make budgeting and financial forecasting an essential process in your execution discipline. Integrate your business plan with your financial plan. Create a culture where you share your numbers with the organization and hold your team accountable for achieving productivity goals. Taking these steps enhances your decision-making process and contributes to the sustainability and growth of your business. This is how you lead, think, plan, and act. Now let’s get after it!