How A Budget Sets You Free

When it comes to running your company, many business owners set goals around Revenue, Growth, and Profitability, but they underutilize the power of a true working budget.?

However, as their company faces uncertainty, they don’t have the proper financial tools to make critical course corrections for their business.? Many people see budgeting as restrictive and time-consuming.? However, it’s actually the opposite!??

For example, we teach new drivers that the double yellow line is not restricting their freedom to use the entire road.? It actually keeps them safe as oncoming vehicles pass by a few away (at alarmingly high speeds)!?

A budget serves the same purpose.? It gives you safety and freedom!

Failing to budget is a big mistake because it is the very activity that will help you grow, stay on course, and see you through a crisis.? You need good financial data to address the economic and competitive landscape.? COVID, Supply Chain, Inflation, and Rising Interest Rates are significant headwinds that must be met with disciplined financial planning.

Improper budgeting results in inconsistent financial performance.? It’s difficult to maintain your focus when your numbers are down and your plan isn’t working.? This causes you anxiety and stress.? This lack of focus can result in knee-jerk reactions, chasing “shiny objects”, and constantly shifting priorities.??

Instead, there are a few simple budgeting techniques that you can use. Your budget is your blueprint to help you plan, execute, measure, and adjust.

I call this my “Budget Builder” Blueprint.

1. Start with last year’s Profit & Loss Statement.? This is your budget template for the upcoming year.? Begin with your Revenue targets and work down the P&L, paying close attention to the largest expense items.? Keep tweaking this until you reach the desired bottom line net profit. You now have the first iteration of a working budget!
2. Get a good bookkeeper and review your budget reports every month.? You should have your financial statements from the previous month in your hand by the 10th of the new month.? Balance Sheet, Income Statement, A/R and A/P Agings.? You can’t run a business without good data.? Don’t ever underestimate the ROI on investing in a good bookkeeper.? It’s the first thing I address with my clients.? I can’t help them if we don’t have good numbers.??
3. Run your reports on both a Cash Basis and Accrual Basis.? You need to develop a sensitivity to the cash you’ve actually collected and the impact on profitability, versus the cash and profit you have already invoiced and expect to earn.
4. View your budget on a “Percentage of Sales Report” and start to benchmark your numbers based on percentages, not just dollars.? As you grow/scale, it’s much easier to accurately track your performance.? I suggest you pay close attention to your cost of goods sold, gross margin, salaries, fixed overhead, and net profitability.? For example, if your salaries are 30% of Sales and you see it spike, you’ll be able to make course corrections.? Having a percentage of sales column on your budget will help you from having to do all the math in your head.?
5. Operate on a “Comparison to Budget Report.”? You may not be able to do this your first year of budgeting.? I encourage my clients to do this in year two or three.? Numbers need context and once you are sensitized to the financial fluctuations in your business, comparing them to your budget is the fine-tuning you need to help you stay on course.

So, the next time you get that gut feeling that you want to improve your financial mastery, take action! Improving your budgeting skills will make you a better business owner and financial manager.?

Remember: Outsource what you can’t self-source!

Patrick

Profit Accelerator Resources: Whenever you are ready, here are three ways I can help you:

1. Financial Dashboard for Making Profitable Decisions This 30-day 1:1 workshop helps you become numbers confident and conversationally competent around the numbers in your business.?We work together to build your 12-month financial forecast, so you have a solid plan for improved profitability.
2. Business Plan Workshop If you are looking to obtain funding from a bank or investors, a well-written business plan and pitch are critical for success.?It’s a 1:1 workshop over 3-4 meetings and you’ll walk away with a professionally prepared business plan to help you raise the capital you need to grow your business.
3. Profit Finder Program I can help you uncover an additional $25K-$75K profit in 30 days or less. I have a knack for finding hidden profit locked inside your business. It may take between 3-12 months to achieve the profit lift, but you’ll have a clear-cut plan and strategy.

Remember business growth is a series of consistent small steps, not giant leaps. If your compensation is well below what you could earn in the open market, it’s time to have a conversation and see how you can run a great business AND pay yourself competitively.