Beauty in Budgeting: Understanding Your Financial Picture (Conclusion)
DALLAS — Mention the word budgeting and most business owners’ eyes glaze over.
The thought of Excel spreadsheets and long meetings in windowless conference rooms is enough to make anyone search for the nearest exit. This is particularly true for entrepreneurs and business owners who get excited about growing a business and solving day-to-day challenges, not diving into the minutiae of supply costs.
However, I find that when properly done, budgeting can be a truly therapeutic exercise that gives us as business owners a comprehensive understanding of our business, and reduces the uncertainty and stress associated with running a business.
BUILD YOUR OWN
A modern budget is less of a budget and more of a ground-up financial model that enables you to identify opportunities for cost saving as well as the causes of cost overruns. To build a modern budget, it’s critical to follow three key steps:
1. Start at the bottom
In order to deeply understand both your business and your budget you must build your budget from the ground up. This means breaking your business down into the most discrete categories. It’s not good enough to have broad categories like “labor” or “supplies.” To develop a meaningful, dynamic, living budget you need to get to the level of how the business actually operates, such as driver-labor, hangers, detergents.
Not only that, it’s also vital to break these costs down on a monthly, not annual basis. I will go into this more later. By performing this exercise you will inevitably discover unnecessary costs that you may have otherwise overlooked.
I personally recommend creating an Excel spreadsheet with tabs for each major category, so that at any point you can deep dive or update any specific category with ease.
2. Roll it up
Once you’ve budgeted your monthly spending for each category for the coming year, the next step is to roll these estimates up into a full monthly budget for the full year. This monthly budget should be nothing more than a roll up of all the estimates from more specific budget categories. However, once again it’s critical that this roll up still has specificity based on how you actually run the business.
For example, in my business we have labor broken down by production, route, and stores; the same with supplies. This enables the managers of those particular areas to be held accountable for meeting their budget targets.
After creating your rolled-up budget it’s important to do one last review and pressure test to make sure that you have made the proper assumptions and haven’t omitted anything. I also like to create a couple different budgets with poor, good, and excellent scenarios to see how we will do under different conditions.
3. Monthly side-by-side review
As we discussed earlier, completing the budget is only the first step. The most important step is what happens after the budget is complete, the monthly side-by-side review.
A budget document is only good if it is operationalized. Therefore, it’s incumbent upon you as a business owner to review your company’s performance against budget on a monthly basis to identify any areas where you’re going astray. In my company we create side-by-side reports showing what we budgeted and what we actually spent each month, and then track where we’re at against our budget YTD. This is an incredibly powerful tool because it enables you to identify issues before they spiral out of control, and keeps your business always humming on the right track.
Building a budget is a lot of work up front. However, you will find that once it’s done and you operationalize it in your business, it will reduce your stress immeasurably.
Having full transparency in the financial performance of your business is a blessing to every business owner. There’s certainly beauty in that!
To read Part 1, go HERE.