Why You Need A Budget

“Nah, we make enough money. Thanks, but no thanks.”

“We never worry about making our payments.”

“Our employees are dedicated to the mission of the business. They’re okay with lower compensation.”

If any of these scenarios sound familiar, stop reading now; this article will not be of interest to you. However, if you want to make more money for your business, stop worrying about making payments, and find ways to keep your top talent, continue reading.

The one thing a business can do to meet all three of these objectives is have a realistic budget.

There are many reasons why every company needs a budget and it all boils down to making more money. Yes; by taking the time to develop and communicate a budget, companies experience organic growth. They are empowered by data to make decisions more quickly that are in line with the direction of the company. This singular, focused drive leads to growth.

To kick start your journey to making more money, follow these four steps.

Step one – create balance.

It goes without saying that with low and limited cash inflows, even the smallest amount of cost overrun can quickly get out of control and be devastating to your business. This is especially true if you have a FFP contract or a SBIR grant; there is very limited – virtually no – opportunity to increase the funding because someone on your team made a mathematical error or your cost of labor, materials, etc… ended up being more than you anticipated. That problem increases with each funding stream your business has. By taking the time to convert all your approved budgets by award into one consolidated budget, your business will have a balanced approach to financial security by allowing you to determine where to cut costs if you encounter an increased cost on a contract. As we say in accounting, ‘for every plus there must be a minus’.

Step two – ensure achievability.

Once you have your consolidated listing, amend it with your indirect costs. Don’t look at the bottom line yet. You don’t want to influence your numbers in any way; they need to be unbiased for the budget exercise to be effective.

Next, analyze each section for alignment, reasonableness and opportunities for savings. Have your long-term business plan or equivalent information with you and refer to it often during this process.

Some questions to keep in mind while you’re reviewing:

  • Does this cost support the strategic direction of the business? If not, remove it.
  • Do we really need to have this? If not, remove it. If yes:
  • Could we get a better price from a different vendor? Get quotes. Be sure to include online sources wherever possible. Include the best value amount in the budget.
  • Is there a possibility of entering an agreement with a vendor, or multiple vendors, and getting a price break? What about better payment terms? Begin negotiations. Don’t include the amount in the budget until the agreement has been executed.
  • Where can we buy in bulk? What would the cost savings be? Include the amount in the budget only if you intend on using it.
  • When was the last time we shopped insurance coverage? If it has been three or more years, contact your insurance broker or shop around yourself.
  • Have we included cost increases for salaries, benefits, and other items?

Once you’ve reviewed each section, review it again. Have someone else review it. Keep doing this until you’re confident this represents the strategic direction of the business at the best attainable cost.

Slow breath in; slow breath out.

Look at the bottom line. Your business plan is most likely achievable if you’re in the black.

There’s still more work to be done, so keep reading.

Step three – Ready. Set. Action! 

This part of the budget process is where the action plan is developed. There are three key areas a small business should focus on.

First, most likely, there were items from the previous step that you noted for further action, like negotiating with vendors and comparison shopping.  Assign these items to the best people/teams to complete them and develop a timeline.

Next, perform compensation benchmarking. The exercise of ascertaining what your top talent could earn elsewhere, as a total compensation package, and comparing to your offering may end up costing more money, which is why many businesses choose not to do it routinely. This is a practice that will be detrimental in the long run. Why? Employees choose to work with a business because of its mission, product offering, etc… so it follows that employees choose to stay with a business because of the way it makes them feel. We all know that earning ‘what you’re worth’ is important to everyone, and this is especially important in a small business environment where each employee wears many hats. Be fiscally good to your employees; it will provide exponential returns to your business through invigorated effort, deeper alignment with the strategic direction, and less time off to deal with the stress caused by knowing you’re worth more to someone else.

Last, consider the business’ growth path. Where should the business be in three years? Five? What will it take to get there, i.e. do our actions captured by the budget support that direction? Where is the market headed? Does the business need to diversify its offerings? Take the time during the budget process, while the data is fresh and as accurate as possible, to answer these questions, then build a plan to achieve them.

Step four – speak clearly; speak often. 

We at Left Brain Professionals have seen it all too often. A great deal of effort was put into making the budget and it sits in a file not referred to. People within the organization were not a part of the process, so they are not aware the business even has a budget, preventing them from being able to make decisions to support it. Ultimately, the goals were not met, and fiscal peril seeped into the every-day lives of everyone.

To avoid this from happening to your business:

  • Include staff at all levels of the business in the budgeting process. It enhances employee engagement and gives them first-hand knowledge of how their actions, or lack of, can have an impact on the total organization. Additionally, it gives you the insight of which employees are not aligned with the business, uncovering opportunities to work directly with employees that might otherwise have fallen off. At best, you develop an employee; at worst, you open those funds to use elsewhere.
  • Turn the budget into a cash flow forecast. Seek additional funding if needed. Be sure to balance the use of debt (loan, line of credit) with equity funding.
  • Compare the budgeted results to the actual results frequently. Best practice is monthly; at a minimum quarterly. Understand the reasons for the variances, even if it created a profit. Share pertinent information with the appropriate areas of the business to facilitate better decision-making and uncover further opportunities to optimize costs.
  • Use the comparison results to update the cash flow forecast to see if current and expected funding levels are sufficient. If so, determine if there is excess funding to invest; make the money work for you.

With over 20 years of accounting and financial management, Melissa can help your business through the budget process and develop strategic plans to support your business’ needs. Please contact or call (740) 816-3040 for a free, no-obligation half-hour discussion.