Every business needs a budget. Whether you are a freelancer, an early-stage startup, or a mature company with 5, 50, or 5,000+ employees, a budget is absolutely necessary to lead powerfully.
- Setting a goal is a critical step in making your compelling vision a reality.
- Tracking against the goal tells you how you’re doing in measurable terms.
- Knowing how you’re doing allows you to make early decisions to avert disaster or leverage success.
A budget is a financial picture set at a point in time that defines a company’s desired performance for the coming year. Once it is set, it doesn’t change, and serves as a fixed measuring stick for actual performance as the year goes on. It is based on reasonable assumptions and should be a challenge, yet achievable with focused effort. Not too easy, not too hard.
- What’s your target?
How much gross revenue will your business generate next year? To generate that level of revenue, what will you have to spend in marketing and business development? How much and when will you need to invest in staff and/or tools to fuel the growth in business?
Sketch out revenue by month, and build up the totals based on your revenue drivers: product sales, hours x rate, contracts by client, etc. Then create expense assumptions that tie in to your top-line projections. This process should get you thinking about your biggest priorities for the business next year. Is it all about growth and scaling? Or is it about reinvestment? Or holding steady through a re-branding transformation? What are the top two or three things that must happen next year?
You now have a financial picture of your business priorities. Is your margin in line with a company of your size, industry, and maturity? Does it feel too rich or too thin? Tweak assumptions until you establish a budget that you and your team can get behind.
Then bless it and pin it on the wall.
- How’s it going?
When asked how your business is doing, you may give answers like, “Pretty good”, “Not so great”, or “Not sure, but I’m really really busy.”
Whether you want to share the actual truth with the person asking, you should know in your head, “Excellent; revenue is 30% ahead of budget and it’s only Q1,” or “Terrible; we were supposed to do a 20% margin in the first half of the year and we’re barely breaking even.”
Let’s say you’ve made $270k in gross revenue this month and a profit of $10k. Is that good? Or bad? How good? How bad?
Having a budget allows you to quantify “Good”, “Bad”, and “Meh”. This is about clarity. The analysis to create a budget gets you thinking and talking in metrics, revenue drivers, expense drivers, and profitability. Then when you’re out in the year, comparing actuals to budget shows you exactly how well you’re doing, or not, and what has to change to get back on track.
- Businesses succeed and fail based on timing and objectivity of decisions.
When should you hire a new employee? When should you spend money on a fantastic new website? When should you cut all discretionary spending?
Your budget is your plan for the timing of all spending for the year. Your spending will likely depend on how much revenue is coming in. Meeting the sales quota in Q1 means meeting cash flow targets in Q2, which allows you to make the badly needed upgrades to your website planned for Q3. Great! Missing the sales quota in Q1 may mean a cash shortfall in Q2, which means you can’t give raises in July as planned. The more closely you’re tracking actuals vs. budget, the sooner you can course-correct and avert major morale and loyalty disasters.
These may be obvious examples, but I’ve seen CEOs make spending decisions by looking at how much cash is in the bank account. They may even do cash flow projections to see how much will be in the account over the next two or three months. This is not a good way to decide to hire someone, upgrade computers, or organize a company retreat. Why? Because you’re operating in reactive mode. You’re spending based on your priority in this moment.
This is not a powerful way to run the business because you’re no longer leading; you’re chasing the day-to-day attention-grabbers, most of which are emotionally charged. CEOs who operate this way never get the business off the ground or beyond a basic level of survival. They waste precious profit which could have been shepherded into value-generating opportunities. Your budget is a record of your big picture priorities and how you have thoughtfully and methodically decided to invest in the business that year.
I’m not saying the budget is a script you follow to a tee. The world is going to change the minute you finish pinning the budget on the wall. By the middle of the next year (or sooner), the whole landscape of your business could be different than you thought, and the budget is stale or obsolete. In July, you may say, “Right now it’s more important to bring in a marketing consultant and clarify our brand and messaging than it is to upgrade our website. The website will have to wait until next year.” THAT’S powerful. You’re making a proactive decision to re-direct budgeted expenses based on today’s climate.
The important thing is that the budgeting process gets you clear about your goals, priorities, and the financial implications of your decisions. It’s a guiding star keeping you centered in your leadership.
It’s no accident that budget season falls during the holidays. Approach your budgeting process with a sense of curiosity, optimism, and collaboration. Envision your business one year from now with questions about how to connect more deeply with customers, employees, and your network. Get excited about what your company is becoming, and then enjoy the ride.
Read Part II on how to make a budget: Budgeting: the Essential Leadership Tool in Three Steps