Okay, let’s be real. Most business owners don’t create budgets.
This is understandable. It is also insane.
They may have ideas about the future. They may have numbers scrawled on napkins or whiteboards and a general intuitive sense about where they are headed financially, but they haven’t understood the essential reasons, relevance, and the utter simplicity of spending some time with their numbers in a budget process.
So, first, I want to convince you of the importance of budgeting, the advantages of creating a budget, and reconciling it as part of your financial discipline. Then I’ll show you how simple it is.
For some of us, even the word “budget” makes us despondent. You might be squirming in your seat right now. Maybe it stems from bad experiences you had when you first started out in life and tried to use one. Whatever the reason, the word budget doesn’t work, so let’s change it!
How about a “Profit Plan?” Does that feel better? Your budget is a proactive tool for ensuring your business creates value and in doing so generates a profit.
Need more convincing?
How about the fact that nearly all larger, successful businesses that operate from the top-down, through divisions and departments, have budgets firmly in place? Nearly every small business owner that we at ThriveCFO have ever taken on as clients have begun to recognize true growth and development only after they have begun to embrace the strategic planning power of their Profit Plan. You can sleep like a baby at night, knowing you understand every number on your P&L (Profit and Loss), and that you have a clear, quantitative plan for how to produce more profits.
Many business owners may have a decent P&L, but they soon learn that reviewing these is like looking in the rearview mirror. The P&L (or Income Statement) is a historical document. It’s great to see where you’ve been but doesn’t give you any clue where you’re going.
Once you engage in budgeting (Profit Planning), however, you start to see the business through the windshield. It might be a murky windshield at first, but as you gather skills and think more and more about the numbers and how the various activities of the business affect them, you’ll begin to look through a windshield that is crystal clear. Instead of moping along at thirty miles an hour, you’ll start feeling as if you’re flying.
This newfound financial intelligence gives you a sense of control unlike anything else. And it’s that budgeting process (coupled with cash planning) that allows you to soar. At Thrive CFO we facilitate this process with our clients on a monthly basis, from implementing the actual budget to reviewing and analyzing the variances.
Just DO it!
Some of this may sound very impressive, but we’re simply attempting to inspire you to begin. Organize your P&L into understandable accounts or line items and look at them. Think about what each line means and how each will show up in the future.
Do you see the prominent word here? Think!
That’s what the budget process is all about: getting you to routinely work with your numbers – to think about them – so you understand them, and over time, learn to forecast the future with increasing accuracy and confidence.
The real trick is just to begin. Start with a spreadsheet – with columns for your forecast, the actuals, and the difference (variance), along with plenty of extra space to explain your assumptions about why a variance may have occurred. That’s it! The simple steps to create your Profit Plan. Your “windshield.”
Maybe at first, you can’t see further than a hundred feet in the dark with these minimal headlights, but you’ll get better as you practice. Forecasts are made up of projections about the past (using that P&L) and predictions about the future. Look at your history; are things going to be the same or different? Think (there’s that word again) about the future and what you can predict. Have your sales systems been revamped for better results; are you getting more leads? Will these bring more revenue? If you think so, forecast it. Don’t worry if you’re right or wrong. This is not a test. There is no right or wrong answer. This is a discipline; a practice. And in the beginning, you’re really just setting up a baseline – some reference points. If you try to do it perfectly, you won’t do it at all, because it can’t be done perfectly.
At the end of the month, plug-in what actually happened. This is where the fun begins. Suddenly, instead of staring blankly at (or avoiding) the rows of numbers your bookkeeper or accountant provided, now you’re looking at the truth – the actual results versus your best beliefs. Think about where you hit it spot on. Think about where you missed. See? You’re thinking about every single line item, every single aspect of the business through the numbers. What could be a better way to spend an hour or two each month than reviewing the way you think about the business and explaining to yourself what went right or wrong compared to what you believed might occur?
That’s basically all there is to budgeting. Step one: get inspired. Step two: do it. Step three: do it consistently and watch your financial intelligence grow. Watch your ability to think strategically grow stronger, feel your confidence increase and your abilities to lead the company and control the profit possibilities reach new heights. Just get started predicting something, and build from there.
I’ve never had a client who mastered the budgeting process stop doing it. Once you begin, you won’t want to stop either. It is invigorating! It can become a few of the most rewarding hours spent by every business owner each month.
Budgeting truly is the art of planning for your profit, then systemically connecting the numbers to the various systems that can have the greatest impact. You can do it! I know you can! Get familiar with your numbers through this practice. Even if the numbers aren’t exactly how you would like, you’ve faced the truth and have learned how to forecast and control the future.
Your 3-Step Profit Plan System:
Begin by generating a copy of P&L statements as far back as you need in order to give you insight into possible historical trends. Then:
- Create a spreadsheet with four columns:
- Budget (projections for next month or quarter)
- Actual (to be filled in from next month’s P&L or quarter-end reports)
- Variance (the +/- difference between Budget and Actual)
- Assumptions (a wide place for notes to yourself about your projections and/or your understanding of any resulting variances)
- Review and think about what you can change to impact the results for the next budget cycle.
- Do it again.