KPIs in Focus Business Budgeting Planning

As part of our ongoing series on KPIs, we look at the budget process – planning for 2023 by reviewing your 2022 actuals and looking at future growth opportunities and the costs associated with their pursuit.

KPIs in Focus Business Budgeting

In the budget process – we look at what we expect revenues to be next year, the costs associated with the business, and new opportunities – new business, new product launch, or new hires. The basis for these forward-looking assumptions is the historical financial data from current and previous years. In addition, we try to incorporate trends from previous years into those projections – seasonality, pipeline reports, HR data, etc.

Why Your Business Needs a Budget?

Failing to plan is planning to fail – Benjamin Franklin.

Running a business is hard work. We use budgets as guidelines to map our goals. For example, if I want to have a million dollars in sales next year, I need to have a certain amount of product (inventory) on hand to meet customers’ demands. But how much? Too little, and purchases go on back order, leaving customers frustrated. Too much, and I have to pay for warehouse space and the cost of inventory sitting on shelves; by looking at my historical data, I can create a budget to help me make informed business decisions.

For example, to have a million dollars in sales, I must have a certain amount of product (inventory) on hand to meet customers’ demands. But how much? Too little, and purchases go on back order, leaving customers frustrated. Too much, and I have to pay for warehouse space and the cost of inventory sitting on shelves. By looking at my historical data, I can create a 4-month rolling inventory that lets me know the amount of inventory needed, allowing me to budget the inventory cost and any related fees like storage, shrinkage, and promos.

Inventory is one of the many moving parts of a thriving business. For example, how many employees do I need for a project? When do I expand the office space? Will all this work lead to profitability? These questions and many more can be addressed in your budget process.

Components of a Budget

A quick financial 101 reminds us of the various inputs to our financial plan.

Revenues – Gross Sales.
Variable Costs – those expenses associated with sales like COGS and commissions.
Fixed Costs – those expenses attributable to overhead like insurance and rent.
Personnel costs – payroll, benefits, and withholdings.
Assets – will any large ticket items be necessary to implement the plan?
Debt service – if you borrowed money to run your business, interest expenses are associated with outstanding loans.
Taxes – if you make money, you will need to pay taxes. As a small business, you may be required to make quarterly payments based on the previous year’s revenue.
Cash Flow Statement – while more of an outcome of the budget process, cash flow statements help business owners plan for needed cash infusions to the business if necessary.

Benefits of a Budget

The budget supports the company’s mission, vision, values, goals, and objectives. To be included in the budget, items should tie into and support overall company goals. If you can’t effectively demonstrate how an item enables a particular goal, you should question its merit.
Tools for measuring performance. A budget is useful only if you update it regularly to reflect actual spending accurately. To understand how the company is doing related to its business plan, we compare actuals to budget projections to determine if any changes in strategy are necessary.
Provides you with an early warning for potential problems. For example, when your budget and take a “big picture” view, you will see potential money problems in advance and be able to make adjustments before the problem appears.
It helps you determine if you can take debt and how much. Taking debt is not necessarily bad if it is necessary or you can afford it. Budgeting shows you how much debt you can take without stress or if it is worth it.

The Big Picture

Creating a budget takes management from its short-ty management of the business and finger-term. This is the chief goal of budgeting, even if management does not meet its goals as outlined in the budget – at least it is thinking about the company’s competitive and financial position and how to improve it. This ensures the team is focused on delivering quality services to clients while at the same time keeping an eye on the bottom line.