A small business’s budget should be a fluid document. At no point in time should an entrepreneur adopt the “set it, and forget it” rule when it comes to budget planning. Ideally, a company’s budget should be revisited monthly. Waiting any longer than 30 days means key items are more likely to slip through the cracks, making the business more susceptible to failure.
That’s why the Lucrum team advises its clients to revisit and evaluate their budgets regularly throughout the year, especially when faced with one of the following situations listed below. Adopting this simple practice into the monthly workflow can help business owners not only stay ahead of the curve, but also the competition.
The numbers don’t jive
Every entrepreneur knows the numbers don’t lie. So when the actual number varies significantly from the budgeted number, dig deep and ask the tough questions.
What wasn’t accounted for? Was an entry posted to the wrong expense category? Was this planned?
While the answer may be as simple as not accounting for an unexpected expense like a new piece of equipment or replacing a faulty server, it’s important to always understand the numbers. Rather than viewing a data anomaly as a setback, view it as an opportunity to gain further insight into the business’s financial health. Basically, learn from it and grow.
Business needs change
Most business’ budgets follow the 60/20/20 rule: Sixty percent of all earnings typically are dedicated to payroll costs (salaries, tax payments, etc.), 20 percent should be allocated toward growth (marketing, advertising, etc.) and the final 20 percent is applied to internal development (ex. staff training).
But what if the company launches a new product? All of a sudden, those percentages will need to shift to meet the company’s new needs. For example, prior to launch, leadership may need to allocate more resources to internal development to bring employees up to speed on the new prototype, “borrowing” funds originally set aside for growth. Yet, once the product launches, those numbers may flip – more funds may be needed for growth to invest in marketing the product to customers, decreasing the need for internal development funding.
It quickly becomes a balancing act; and business owners must not only be willing to reallocate assets on the fly, but also be open to staying flexible and fluid with regards to the decision making process as a whole.
The next big thing falls through
Sometimes business owners place all of their eggs in one basket and when that big contract they were betting on falls through, it throws their projections off… way off. When this happens, many entrepreneurs don’t know whether to leave the budget as-is or update it based on the new information.
The answer is, it depends.
Begin by looking ahead to the remainder of the year. Will the full-year budget accurately represent the business’s 12-month performance? If so, the issue will likely self-correct.
Maybe the contract’s been delayed several months and is still expected to be a revenue generator later in the year. If this is the case, it’s pretty simple to push back the start date and adjust the revenue and expenses related to that project. But if the contract gets cancelled or is delayed indefinitely with no other sources of alternative revenue are on the horizon, be prepared to break out the red pen and make significant updates to the company’s budget numbers. When budgeting, the word of the day is “conservative” in order to keep the business on track and afloat.
Need assistance reviewing your company’s annual budget? Contact the Lucrum Consulting for assistance. Our team can help you with setting up a budget analysis timetable, identifying data anomalies and more. Call us at 704.927.0462 to get started.