It’s a new year, which is an ideal time to evaluate your business plan and ensure your budget is appropriately aligned with it, if you haven’t done so already. A budget is one of the key drivers of financial tracking and is key to setting performance expectations for the whole business as well as driving growth and profitability. 

Below are some tips from our CFO Advisory Group on smart business budgeting and how to properly track the budgeted results. 

Importance of Budgeting 

A budget helps sets the tone, expectations and financial goals for the entire company as well as its department/business unit levels. With a budget in place, management teams are equipped to: 

• Communicate employee expectations. Without a budget, how will employees know what the expectations are for financial performance and the role they play in it? Effectively communicating the company’s budget to employees and department heads, especially as you kick off a new year, will put forth a realistic path in place and set expectations for everyone within the organization. Often, budgets can also be used as a baseline for rewarding employees or giving out bonuses, so employees know what goals they need to obtain to achieve bonuses.
• Evaluate staffing or large expenditure needs. If a company sets a budget to support aggressive growth for the year ahead, management teams can plan accordingly and potentially start seeking and interviewing candidates to fill additional positions. This will not only accommodate growth from a staffing perspective, but it will also mitigate increasing the workload for current employees. Also, if there are large potential expenditure needs outlined in the budget, the company will have time to evaluate various options, perform financial modeling and efficiently plan.
• Manage cash flow and the need for external funding options. The old saying “cash is king” is true. Having a realistic budget will allow a company to model out potential future cash flows and determine whether they will have excess cash to deploy responsibly or not. If the company anticipates shortfalls, they’ll need to find external forms of financing or funding to keep the company on a healthy financial track. 
• Set realistic sales targets and analyzing revenue activity at the customer/product level. Sales activity is what drives a business forward or puts it behind if lacking. It is crucial for a company to know its customers, products and business units. Having a budget will force the sales team and other company executives to dig into all customers and better understand their needs. Plus, a company will be able to identify which customers are driving revenues and which ones maybe aren’t worth driving the business forward.

Tracking Your Budget Performance

As the year progresses, it’s critical to keep a strong pulse on your budget through effective performance tracking. Keep these tracking mechanisms in mind to manage your budget effectively: 

• Evaluate results on a monthly basis: At a minimum, budgets should be reviewed monthly to compare actual results. Doing a detailed, line-by-line monthly review of financial activity compared to the budget will allow a company to track why they are hitting or missing the mark. Including detailed explanations on why a certain line item was hit or missed will allow the company to understand the situation and help put action plans in place.
• Have monthly meetings and hold others accountable: Monthly meetings with key executives and department heads to review budget-versus-actual results is vital to your success. This will help ensure everyone clearly understands why numbers were hit or missed, maintains accountability and creates opportunities to develop ideas or action plans to get back on budget if numbers were missed. Having meetings also sets an open dialogue for executives or department heads outside of finance to take ownership and accountability for their team or departments financial performance.

Here to Help 

If your company does not have a budget in place for the new year, it’s not too late. However, it’s critical prioritize budget planning now to ensure you’re positioned for success. 

Our business advisors specialize in helping small- to mid-sized companies implement budgets that support their overall goals. To obtain assistance with your business budgeting or to gain an external evaluation, we’re here to guide you.