September brings the beginning of fall, autumn leaves, cooler temperatures and… budgeting. Most businesses of the size I deal with use the calendar year as their fiscal year. September is when most start their budgeting process, with the hope of completing the budgets by year-end.
Does every company need a budget? I don’t think so, but it is best practice, and most companies benefit from having a budget. Budgets are an example of management by exception. When 2025 gets underway, we compare actual results to our budget. If we’re hitting our marks, good for us. If there are variances, especially unfavorable variances, we need to act.
Budgets often come out of a strategic process within the company. Most companies can benefit from planning for the future. Planning will help you achieve your goals. Perhaps the thought process itself is the biggest benefit. There is power in thinking through your plans and committing them to writing.
I like the approach called SRO Budgeting. SRO stands for Survival, Realistic and Optimistic.
Typically, companies start with a Realistic budget. This is the best guess of next year’s financial performance. Start with 2024 results or 12-months trailing results. Adjust the actual numbers for changes you want to make for 2025. These might be higher sales, adjustments in personnel or any number of things. The Realistic budget is the one that goes in your accounting system for comparison to actual results.
Do an Optimistic budget to see what might happen if everything goes better than you expect. This part is fun.
The Survival level budget is the lowest level of revenues which allow the business to survive in its current form. While one wouldn’t aim to achieve this, it is helpful to know that level. If this revenue baseline isn’t reached, drastic survival level tactics will need to be implemented.
Dealing with Uncertainty
Sometimes the Survival budget is too optimistic. An example is the onset of Covid where we all had to scramble to deal with a true Black Swan event. People were doing ‘Zero Revenue budgets’ to see how long they could last. Fortunately, the government stepped in and provided lifelines to many.
What if we have a recession in 2025? Recessions are part of the normal business cycle but knowing when and how deep would be nice. Unfortunately, that’s beyond my abilities. Setting up your budget model in Excel will allow you to adjust your budgets and do scenario planning. For example, you might want to model 10%, 20% and 30% decreases in Revenue for 2025, just to see if that gets you to the Survival level
Goal Setting
Another output of the strategic process and budgeting is goal setting. This is often done for the company, for business segments, and for individuals. Realistic goal setting is another best practice that benefits most companies and staff.
I like the tried-and-true SMART goals: Specific, Measurable, Attainable, Realistic and Time-bound.
Timing
You want to have the budgets in final form by year-end. Often, companies will set a deadline of December 15th or even earlier. Make sure there is time to do several iterations and reach consensus on the end product.
The budget needs to be input into the accounting software in time to do budget-to-actual reporting for January. And remember, the accounting department is already awfully busy in January. Better to get the budget input in late December if you can.
The Mechanics
I have simple templates I can provide to get you started if you’ve not done this before. Just ask and I’ll send them.
Remember, you must use the chart of accounts from your general ledger and budget by month. This has to be on the same basis as your accounting system in order to set up comparability.
I suggest doing your budget in Excel and then transferring the end result into your accounting software. Doing the budgeting within the accounting system is often impossible and when it is possible, it isn’t ideal.
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