Why You Need To Start Your Year-End Budgeting Now [Updated October 2022]
Oct 03, 2022 | Business Planning, Accounting & Finance
For many entrepreneurs and business owners, a “year-end budget” elicits dismal groans and a flood of negative thoughts.
The tedious task of analyzing your business’s financials and dissecting fund allocation is likely to be far down your list of desirable ownership responsibilities. As a result, you may be inclined to put it off until the last minute.
But this is a big mistake.
Suppose you wait until December to start thinking about your budget for the upcoming year; you can undermine the importance of developing a solid business roadmap, impede your forecasting and goal-setting efforts, stall fundraising activities and even miss operational or loan-related deadlines.
As a CEO, you’re often pulled in many different directions, and balancing priorities can be a real struggle. Yet- procrastination in this area can jeopardize your company’s financial health, especially given the economic uncertainty that continues to persist in lieu of a potential recession in 2023.
High Uncertainty Amid Recession Fears: Setting a Business Budget Amid Economic Turmoil
Once again, cash is king.
Analogous to our budgeting directive advice during COVID-19, maximizing cash generation during the budgeting process is crucial. During the budgeting process, make a point to receive a daily update from your accounting team. If liquidity is tight, determine when you will run out of cash, so you can determine how much you need to cut.
Consider cash maximization (and cash generation) activities like operating expenses, staffing, R&D, and capital expenditures.
Read more: Cash Flow 101: Tips for Management, Projection, and Long-Term Improvement
Everything is on the table when preparing for a recession (or whatever experts end up calling this strange time in economic history).
Consider updating and improving how you manage payables and receivables and reduce on-hand inventory or company-wide expenses.
Whatever you decide to implement to maximize cash on hand, remember that the execution of these decisions must be done thoughtfully and rationally, not as a result of panic or unnecessary anxiousness.
Don’t rely on previous budgets
Just as 2020 was a year unlike any other until 2021, eventually, 2023 will become a year unlike 2022; 2023 will be (for reasons that are still yet to be entirely determined) unfamiliar to us. As such, it is unwise to simply extrapolate from last year’s data and spending analysis.
Authors Simon Freakley and Lisa Donahue for the Harvard Business Review recommend taking a zero-based budget mentality to understand how the business drives value and where it does not, advocating that business owners should “look more keenly at costs than at revenues.”
Freakley and Donahue argue that owners should identify “how, when, and by whom every change in revenue will be produced — proof (as best you can establish it) of the numbers in the plan.” Businesses can do this by speaking with key customers to determine a more accurate forecast and reconfirming demand for existing orders.
Data on confirmed customer orders will help you reassess your need for raw materials and other purchases. Engaging proactively in this process now, instead of reactively during a downturn, reveals new opportunities and can help set a new path forward for resource allocation or even structural change.
Read more: How to Build a Recurring Revenue Business Model: 4 Key Factors
Work backward from the worst-case scenario
Business owners must walk a fine line between proactively assessing their risk in a volatile marketplace and not making rash decisions based on said potential risk. In detail, business owners and others in financial leadership roles should consider plans for mild, moderate (most likely), and severe (worst-case) outcomes.
Creating a SWOT-like plan for each scenario will help determine how a downtown or potential recession will affect your business and to what length the business must take to prepare.
How much cost-cutting will be required to survive the worst-case scenario with positive cash flow? Is it a matter of grounding company travel or laying off employees? Starting from the worst-case scenario allows businesses to look at the starkest measures that need to be taken.
Read more: What Makes a Good CFO in Challenging Times? [4 Questions to Consider]
However economic indicators decide to play out in 2023, it is critical to get a head start on year-end budgeting and make time to address this ownership task head-on. Here are four fundamental reasons why:
1. Proper planning and execution take time.
Developing your budget at the end of Q3 is essential to proper planning and performance for the upcoming year. You should be starting the process right after Labor Day.
According to the U.S. Small Business Administration, a budget outlines the funds needed for labor or materials, total start-up costs for new businesses, operations costs, revenues needed to support the business, and a realistic estimate of expected profits.
When should I start my business budget?
Starting your budgeting process in September allows you 3-4 months to gather information, identify short- and long-term goals, crunch the numbers, make projections, get feedback or approvals, and finalize your plan. You will need this period to give these activities the attention they require.
Your budget sets a critical pace for your business and gives you the roadmap to maintain financial stability over the next year. To build that map, you must be able to:
- Analyze your business’s performance metrics
- Identify your profit and loss numbers
- Pinpoint the number of sales you’ll need to bring in
- Determine whether fundraising will be necessary
- Ascertain where and how much money will be spent (resource allocation)
- Apply for a loan if needed
Can you realistically address all of these requirements in just a few days or weeks? Waiting until December to handle the budget puts you behind the curve. You need the next few months to organize and carry out all the vital components of successful business budgeting.
2. You have to gather input and validate plans.
If your business consists of multiple departments or answers to a board, budgeting involves more than just independent financial analysis. It’s essential to get input and insight from the various divisions if you’re going to forecast correctly and build a comprehensive budget.
What are your sales plans for the coming year? What are your operational strategies? Will you need to hire additional employees? Are you expecting any significant capital expenditures? You must obtain answers to these types of questions to formulate a sound budget.
Related: CapEx Budgeting for Manufacturing Companies [6 Steps to Take]
Getting critical members to agree on a high-level mission could be challenging before delving into the nitty gritty of budget development. Before laying out the numbers, it will take time for you to assimilate these contributions, make decisions, and garner buy-in.
3. Crucial deadlines are looming.
Many companies, especially those in the early stages of development, need to have budgets submitted to their bank 30 days before year-end. In other words, your plan has to be finalized and submitted by December 1 — which means you definitely can’t wait until the end of the year to make time for budget creation.
In addition, you may need to meet specific deadlines for board review and approval. Hitting these dates is essential to ensuring business success and growth. Don’t “back-burner” the tasks associated with budget preparation and risk missing mandatory dates for plan submission.
4. Budgeting is an iterative process.
You’re not going to nail the perfect budget on the first try. That’s simply not how business budgeting works. The entire effort is an iterative process that demands the requisite time and attention to evolve.
On the first pass, you typically begin with a “wish list” based on the information you’ve gathered and the projection analysis you’ve completed. Remember that people tend to be overly optimistic about revenue (which is why many companies miss their plan).
Therefore, you must undergo a refinement process: accurately update your projections, eliminate where necessary, and reallocate where appropriate. This could take countless rounds of review and revision.
If you answer to a board, do not expect the budget to go through on the first attempt. You must give yourself time for multiple reviews and the work associated with implementing changes.
Ultimately, skimping on the time needed to develop a solid budget may save you some headaches in the moment, but it can lead to significant financial problems down the road. This is not an undertaking to be handled lightly.
If you haven’t begun the process yet, you’re already behind schedule. Start now. Give yourself the leeway to build the budget to sustain your business the year through and through the unknown facing us all in 2023 and beyond.
If the idea of budget development still concerns you, it’s wise to put this crucial function in the hands of experts. Schedule a consultation with G-Squared Partners for an informative, open discussion about your business.