For many entrepreneurs and business owners, the term “year-end budget” elicits dismal groans and a flood of unfavorable thoughts. The tedious task of analyzing your business’s financials and dissecting fund allocation is likely to be far down your list of desirable ownership responsibilities. As a result, you may be inclined to put it off until the last minute. But this is a big mistake.
If you wait until December to start thinking about your budget for the upcoming year, you can undermine the importance of developing a strong business roadmap, impede your forecasting and goal-setting efforts, stall fundraising activities and even miss operational or loan-related deadlines. Procrastination in this area can jeopardize the financial health of your company.
As a business owner, you’re often pulled in many different directions, and balancing priorities can be a real struggle. Nonetheless, it’s critical to get a head start on year-end budgeting and make time to address this ownership task head on. Here are four fundamental reasons why:
1. Proper planning and execution takes time.
Developing your budget at the end of Q3 is essential to proper planning and execution for the upcoming year. In fact, you should be starting the process right after Labor Day. This allows you 3-4 months to gather information, identify short- and long-term goals, crunch the numbers, make projections, get feedback and/or approvals and finalize your plan. You’re going to need this stretch of time to give these activities the attention they require.
According to the U.S. Small Business Administration, a budget can be used to outline the funds needed for labor and/or materials, total start-up costs for new businesses, costs of operations, the revenues needed to support the business and a realistic estimate of expected profits. Your budget sets a critical pace for your business, and it gives you the roadmap to maintain financial stability over the course of the next year. In order to build that map, you must be able to:
- Analyze your business’s performance metrics
- Identify your current financial standing
- Ascertain where and how much money will be spent
- Pinpoint the amount of sales you’ll need to bring in
- Determine whether fundraising will be necessary
- Apply for a loan if needed
Can you realistically address all of these requirements in just a few days or weeks? Waiting until December to handle the budget puts you behind the curve. You need the next few months to organize and carry out all of the vital components of successful business budgeting.
2. You have to gather input and validate plans.
If your business consists of multiple departments or answers to a board, budgeting involves more than just independent financial analysis. It’s important to get input and insight from the various divisions if you’re going to forecast correctly and build a comprehensive budget.
What are your sales plans for the coming year? What are your operational strategies? Will you need to hire additional employees? Are you expecting any large capital expenditures? You must obtain answers to these types of questions in order to formulate a sound budget.
Truth be told, it could be a challenge simply to get critical members to agree on a high-level mission before delving into the nitty gritty of budget development. It will take time for you to assimilate these contributions, make decisions and garner buy-in prior to laying out the numbers.
3. There are crucial deadlines looming.
Many companies, especially those in the early stages of development, need to have budgets submitted to their bank 30 days before year end. In other words, your plan has to be finalized and submitted by December 1 — which means you definitely can’t wait until the end of the year to make time for budget creation.
In addition, you may be required to meet specific deadlines for board review and approval. Hitting these dates is essential to ensuring business success and growth. Don’t backburner the tasks associated with budget preparation and risk missing mandatory dates for plan submission.
4. Budgeting is an iterative process.
You’re not going to nail the perfect budget on the first try. That’s simply not how business budgeting works. The entire effort is an iterative process, one that demands the requisite time and attention to evolve.
On the first pass, you typically begin with a “wish list” of sorts, based on the information you’ve gathered and the projection analysis you’ve completed. Keep in mind that people tend to be overly optimistic on revenue (which is why so many companies miss their plan). Therefore, you must undergo a process of refinement: updating your projections accurately, eliminating where necessary and reallocating where appropriate. This could take countless rounds of review and revision.
If you answer to a board, do not expect the budget to go through on the first attempt. You need to give yourself time for multiple reviews and the corresponding work associated with implementing changes.
Ultimately, skimping on the time needed to develop a solid budget may save you some headaches in the moment, but it can lead to major financial problems down the road. This is not an undertaking to be handled lightly. If you haven’t begun the process yet, you’re already behind schedule. Start now. Give yourself the leeway to build the kind of budget that will sustain your business the whole year through.
If the idea of budget development still concerns you, it’s wise to put this crucial function in the hands of experts. To find out more about why your business should outsource its finance and accounting needs, download our free tip sheet.