My name is Lee Ann Collins, managing partner of Lane Gorman Trubitt (LGT), a public accounting firm in Dallas, and this job is keeping me up at night.
I recently went woke up from a particularly horrible nightmare in which my biggest client had gone out of business because their budget for the year focused on workforce growth and keeping the office stocked in candy.
While my nightmare is definitely not a reality for our clients, formulating and setting a budget can be a long and stressful process. These are my top five tips for creating a budget.
Ask the questions
When a company begins to look at creating a budget for upcoming year or years, they have to ask a lot of ‘what if’ questions. What if we lose 5% of our workforce? What if there is a natural disaster and we cannot access our offices? What if our partner/lead salesman gets in a car accident? What if there are faced with new regulations on our industry that will impact the way we do business? What if we grow more than expected and need to bring on a larger workforce? What if our new initiatives are highly successful and bring in increased revenue? While it is possible to plan for some these “what ifs” with training and/or insurance, other “what if” questions can’t be anticipated and still should be incorporated into the budget. It is important for a company to ask the “what ifs”, and make estimates of what that will cost the company. Make sure to ask “what if” revenue questions also (not just expense control) and account for them in the budget process.
Collect the data
Look at the company’s historical data to help you determine what is a reasonable expectation of growth or loss in the upcoming year. Knowing what a company was doing to sell the service or product during a good year can help them budget for growth in the upcoming years. Unfortunately, a company cannot rely entirely on historical data to shape their budget. Knowing what the economic forecast is for an industry can help them plan accordingly. Is a strong regulation on internet privacy going to require an online business to reformat its web store? Maybe the tariffs are impacting manufacturing businesses’ ability to obtain affordable materials. Change in climate can impact the amount of days a construction company will be able to work. Estimates on how the market may fluctuate will help a company decide if this is an expansion year or a maintaining year. Some companies might even have to plan for a loss of revenue.
Set some goals then make a plan
Once sufficient information is gathered it is time to set some goals. Having reachable budget goals is essential to help determine if the budgeting process was successful. The more specific, measurable, achievable, reasonable, and timely your goals are, the better the success of the budget can be determined.
Once a company creates a goal it then needs to make a plan. A goal of increasing revenue by 5% is great, but it has to come along with spending plan to support it. If you want to increase revenue do you need to budget more money to business development? Maybe increasing your workforce to reclaim business that you were unable to meet the needs of previously is your 2020 goal. An increased workforce needs HR support and an IT department that can manage additional workstations and software needs. All of these items need to be accounted for in the budget plan.
If there is a major problem and the company didn’t create a plan to deal with the consequences, then they can end up not having the funds to pay employees, owners, or vendors. If this happens, whatever a company’s goals were, they have now shifted to one goal of staying in business.
Be conservative but not stingy
When determining income it is a good idea to skew estimates to be lower than projected. The opposite is true of expenses, plan for these to be higher. If the company does better than expected, then everyone is the hero for creating a plan and executing it. If the opposite happens and the company doesn’t do as well then at least the loss is not as devastating to the company’s bottom line.
It is not a good idea to be too stingy and make major unneeded cuts. Every company will have a period where they have to scale back and rebuild or wait out an economic dive, but making overly conservative cuts can harm a company. Cutting departments that are not directly related to the production of the product or service you provide might offer an initial benefit by decreasing expenses, but a company needs support services like human resources, IT, and marketing to help our companies grow. When you cut from these departments determine what the impact will be on the product, workforce, and productivity and if that is going to help or hinder the company.
Monitoring the progress of the company is the key to a successful budget. Watching for trends, hits, and misses allows a company to adjust the budget as needed. But most importantly, asking why this trend happened creates an opportunity to improve our budget in the future.
A budget is not a static document. It is dynamic and should be modified as needed throughout the year.