The Budget

01/29/2025 | Big Office Man CFO |

In the Wilkins household, the word “budget” is often met with resistance. My wife, a lovely school teacher, feels that a budget is a tool for control rather than a set of goals to achieve. However, aligning with these goals can create a strong sense of common purpose.

While not every company needs a budget, it is a best practice that benefits most. Budgets allow for management by exception: comparing actual results to the budget and taking action if there are unfavorable variances.

Budgets often stem from a strategic process. Planning for the future helps achieve goals, and the thought process itself is beneficial. Writing down plans can be powerful.

I prefer the SRO Budgeting approach: Survival, Realistic, and Optimistic.

  1. Realistic Budget: This is the best guess of next year’s financial performance, adjusted from the previous year’s results. It goes into the accounting system for comparison to actual results.
  2. Optimistic Budget: This fun exercise shows what might happen if everything goes perfectly.
  3. Survival Budget: This is the minimum revenue needed for the business to survive. It’s helpful to know this baseline, even if it’s not the target.

Dealing with Uncertainty

Sometimes, even the Survival budget is too optimistic, as seen during the onset of COVID-19. Companies created ‘Zero Revenue budgets’ to see how long they could last. Government support provided lifelines to many.

In case of a recession in 2025, it’s wise to model different revenue decreases (e.g., 10%, 20%, 30%) to see if they reach the Survival level.

Goal Setting

Budgeting and strategic processes often lead to goal setting for the company, business segments, and individuals. Realistic goal setting is beneficial, and SMART goals (Specific, Measurable, Attainable, Realistic, Time-bound) are a tried-and-true method.

Timing

Budgets should be finalized by year-end, often by December 15th. Allow time for several iterations and consensus.

The Mechanics

I have simple templates available if needed. Start with the big picture: revenue, margins, product mix. Breaking down big numbers, like labor, into manageable objectives and costs can reveal a lot when comparing actual to projected results.