So… How do you know if your business is really doing well?
What will your business look like next year? Is it climbing or declining?
What are your goals for the next 5 years and beyond?
How are you breaking down your 5 year plan into annual goals?
Do you really need an annual budget?
What exactly is an annual budget?
If you don’t have answers to ALL of these questions, you’re missing an important opportunity, one that should be considered the most vital aspect in achieving success in the operation of your business!
It might seem like a simple principle but it’s one of the most commonly overlooked exercises. An annual budget is an outline of the income and expenses you are anticipating over the next 12 month (your fiscal year) along with other transactions such as: asset acquisitions, asset transfers, obtaining loans, and making short term investments …etc. The expectations you outline will help you set goals and develop a clearer picture of your financial future for the upcoming fiscal year.
Annual budgets, usually setup for 12 months, are then broken down into a monthly picture and can be a vital tool to help you measure the actual performance of your business as opposed to the often lofty expectations we imagine. As you engage in business throughout the year you can start to draw measureable comparison between your results from month to month.
An Annual Budget is a projection tool that can help you set reasonable goals with measureable results for you and your management team and it doesn’t need to be 100% accurate; it is a proven tool that can help you measure, predict, forecast and guide you through important decisions throughout the year.
Annual budgets can also help you develop a realistic income statement and balance sheet to accurately show cash flow as a result and not just the vision you hope to achieve as a business owner.
Why are Annual Budgets important?
Annual budgets are a vital tool for measuring business performance and can provide you with the right information necessary to analyze the natural ebb and flow of your expected results vs. your actual results. Once you start to measure this dynamic on a consistent basis you will start to see your business from a whole new perspective. Understanding what affects your month to month revenue can help you forcast your future needs with more accuracy.
Here are a few things to look at in creating a budget that can help you measure its impact on your success:
– Did your budget over or under promise?
– What market conditions changed / economically or competition wise.
– Bad month? Did you experience internal problem (lack of sales performance, no marketing plan).
– What are some of the things you experience on a consistent basis. Do you have your own ‘Almanac’? If not, this will help you create one!
A well defined annual budget will help you keep track of your goals and better understand the many changes that can affect your business.
This all leads us to some very important principles:
It is critical that you review your annual budget every month, actual financial reports vs. what you set in your budget will help you make appropriate decisions as you respond to the needs of your company so you can keep your business on track. Most companies review their financial reports by the 15th of each month, looking back over the previous month to establish a clearer picture of actual returns vs. the ones you might have anticipated.
Annual budgets can help anyone: individuals, corporations, governments and non-profits regardless of size.
So don’t be afraid or think it’s an unimportant task, sit down and map out your expectations for the year, it’s not only a great exercise in discipline, it just might make the difference between a successful year and an exceptional year.