Money makes it stronger

24 October 2015

Use your budget to juice your strategy

A few years ago I wrote an article about why it’s important to do both strategic planning and budgeting. It even has a link to a fun old Reese’s commercial.

So let’s look at what is involved in an annual budgeting process.

There are 4 basic components:

  • The revenue forecast
  • The baseline budget
  • The strategic investment portfolio
  • The profit allocation

For those of you in my Strategic Leader and Rising Leader programs, we’ll be talking about how to do each step in upcoming webinars. But for now, let me give a quick overview of them.

The reason most people don’t do a revenue forecast is because of the uncertainty of trying to predict future sales. That uncertainty is pronounced in small businesses – though revenue starts to get more predictable in Stage 2, and that’s why a revenue forecast starts to become a good idea. But a poor revenue forecast is better than no forecast at all, and you’ll get better each year you do them. (Warning: if you have a poor forecast, do not rely on it for major spending decisions!) If you just end up with a range of “between $1.2MM and 2.0MM” or an observation of “our forecast only gets us to 40% of this year’s revenue level,” those are still useful in charting your strategic course.

The baseline budget has all the costs that are involved in continuing your business. The easiest way to start to come up with the baseline budget is to take last year’s budget and replicate it. I suggest you group expenses into meaningful categories – it’s more useful to know your combined spending on rent, insurance, utilities, and other basics is, say, 30% of the budget, than to have each of those items listed separately.

The strategic investment portfolio comes out of your strategic planning – it’s the investments needed to accomplish the goals you’ve set. That information should come from business cases you do for each of the major goals you have. (Detailed instructions for a business case are part of our Strategy Toolkit that is included in our Starter Kit.)

Finally, the profit allocation divides the profit that’s left over into 3 buckets that show how much is actually free and available, and how much is reinvested in the business.

Remember that these steps can be adjusted to be simpler or more sophisticated for your business. To turn an old phrase…it’s the budgeting, not the budget, that matters.