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By: Helen Braswell Kakouris CPA, Co-Founder of VaroTeam, a cloud-based accounting company headquartered at Miami Beach.
For any business, small or large, getting your budget right can be the thin line between success and failure. At VaroTeam we are well-versed on planning and executing an effective budget. Given that we are based in Miami Beach, we thought we’d share a few tips for local entrepreneurs and business owners.
Firstly, your budget has to align with your vision and goals. They are the foundation on which you can build your budget. So ask yourself: Are your vision and goals specific, measurable, achievable, time based and relevant? This is the S.M.A.R.T. acronym from a paper published by George Doron almost four decades ago. A poorly formulated goal could be “I want to grow a large company.” An infinitely better goal would be “I want to increase company sales by 30 percent by the end of 2022.”
Secondly, what is your management style; are you aggressive or conservative? That will ultimately decide whether you are willing to absorb losses, and so will shape your budget. A whole host of factors will be at play, so that is a question that every busy owner must reflect on individually.
Next, think more widely: What are the industry and economic influences that should be considered? Those are likely to be industry specific. The Big Four accounting firms release economic forecasts for different industries each year, which can be a great starting point. Then go further and seek out more industry specific information sources. One question this year is: Was 2020 a crazy anomalous financial year, or should we plan for more of the same in 2021? That’s a hard question to answer, but focusing on issues affecting your industry specifically is the best way to approach it.
Go deep on your revenue: What is the overall revenue goal? Are you hoping to offer new products or services? If you want to up sales, perhaps you need new sales personnel, how you budget could depend on their level of experience. Also, look at industry specific seasonality. For retail, the high season is the pre-Christmas period, for many in the tourism industry it will be the summer months.
Consider your costs. Do you need greater inventory to satisfy orders? What is the staffing cost required for increased sales, or even the cost of outsourcing some tasks? Also, try to predict upcoming costs, like any equipment purchases that could be beneficial. That could be buying more bandwidth for a cutting-edge SaaS solution, or as simple as new laptops for staff members. Whatever the business, try to estimate those costs as accurately as possible.
Finally, there are two types of budget frameworks: A Historical Budget, and a Zero-Based Budget. With a Historical Budget you consider historical data from previous years to help plan for next financial year. In its most simple form, Zero-Based Budget is when you start from zero, emptying all of your expenses and reconsidering whether they are justified on a case by case basis, aiming for a leaner strategy. The later method was developed by Peter Pyrhh in the 1970s but has gained immense popularity in recent years. We would recommend a hybrid of both methods. You can use historical data as a base to develop revenue and payroll, with all other expenses using the zeroed out approach.
Remember, the value of a budget depends on how you use it: Your budget needs to be reviewed consistently and compared against your actual progress. 2020 has taught us that there’s only so much you can prepare for, but nailing down a solid budget will certainly help you ride out the unexpected.
