The first thing you need to know when creating a budget is that it is wrong from the start.
In the world of accounting and finance, we like things to be precise and tie out neatly. A budget, on the other hand, is meant to be a predictive tool and a roadmap to help you get to where you are going.
When you enter an address into your GPS, you often get three to four different routes you can take to get to your destination. Sometimes the route has construction or other traffic impediments along the way. Think of a budget somewhat the same way. You build assumptions that you can change based on the route you decide to take and the detours you may face along the way.
In this way, a budget not only sets the course for where a business is headed but also allows it to alter the route along the way. As both a tactical and a strategic resource, budgeting offers many benefits and is a critical business management tool.
Budgeting Sets the Course
Every business owner has a goal in mind and ideas of how to achieve that goal. A budget forces us to think through the actions and steps to reach that goal vs. just jumping in. For example, if you need to hire 20 new staff members to deliver, you will not want to do so unless you can show the incremental revenue increase to cover those costs. Using the GPS example again, a business needs to understand if they can afford to turn right, or if they should turn left to avoid the obstruction in the road.
A Budget Allows for Quick Pivoting
One of the greatest tools a CFO has in their toolbox is the ability to build a budget model that will allow for quick pivots throughout the year. We are trying to predict the future based on assumptions from the past. In other words, a budget is our best “guess” based on the inputs we know to be true at a given time. We may be correct, or, in some cases, we may be wrong, but with a budget in place, a business can quickly adapt to changing conditions.
Creating a Budget is an Essential Business Activity
So, if a budget is wrong from the start, why would I create one?
- Prioritization is key to success. There may be activities that are more immediate and those that can be pushed out further based on your financial goals.
- A budget will also allow for the creation of KPIs (Key Performance Indicators) that can be tracked against performance monthly and quickly assessed and acted upon.
- A budget is essential for identifying trends, tracking performance, and making quick and informed decisions.
- To achieve your goals, you may need investment and a sound financial plan will help you in attracting banks and other investors.
- As time goes on, you will want to track and report against your budget assumptions so that you can continue to work towards your goals confidently.
- Finally, a budget can help you to change direction quickly as needed.
While a budget is essential, it’s not always right - assumptions change and plans evolve. But it is our best map to get to where we are going. Like a good GPS, it will not show you the only way to arrive at your destination. Rather it marks the signposts along the way so you can make your best decisions over time.
How a CFO Can Help
From my experience, creating a budget always reduces uncertainty and helps our clients to make informed business decisions (which probably explains why one of the most requested CFO services we receive is for budgeting and forecasting!). I have been with CFO Selections for 12 years and each client I have worked with in that time has had a unique situation, but the one similarity was the need for financial GPS. In each engagement I have been a part of we were able to translate the vision and direction of the company into a financial model that showed how to get it where it wanted to go using a budget.
When you need a budgeting process that can help your company achieve its business goals, we can help! Our team of consulting CFOs can improve your budgeting process to allow you to pivot more quickly in response to market changes. Our team brings decades of experience to every role and can advise on how to budget better to succeed in today’s changing environment. Contact us today to find out more information!
About the Author
Becky Todd, Western Washington Practice Manager, CFO Selections
Becky is an experienced financial leader with over 20 years of experience in industries that include nonprofits, aviation, software, and retail. She has extensive expertise in helping small to mid-size companies and organizations gain control over their accounting/finance operations and apply their financial assets to support the accomplishment of key organizational objectives.
As the Western Washington Practice Manager for CFO Selections, Becky ensures the alignment of the right CFO consultant to client organizations. Becky can be reached at btodd@cfoselections.com.
