Companies frequently begin budgeting and goal-setting for the upcoming year at the end of the current one. And this includes a properly executed annual budget.
Good financial planning helps managers gain a clearer understanding of the company’s real financial situation. This enables them to optimize decision-making and develop more assertive strategies that boost business growth and performance.
But how to make a good annual budget for your company? Check out this post for some unmissable tips so you don’t make mistakes when doing your financial planning.
Align the annual budget with the organizational strategy
Financial planning must always be well aligned with the company’s overall objectives. Is the idea to grow and expand operations? Invest in new segments? What is the company’s idle capacity and how far can it grow without having to invest in expanding its structure? Is the company financially prepared to expand its operations and accommodate a supposed increase in demand?
The definition of the annual budget must consider information from different sectors of the company, such as the commercial sector, the production sector, the logistics structure, among others.
Consider multiple scenarios
It’s crucial to consider a variety of eventualities when creating the upcoming annual budget. Even though the future cannot be predicted, plans for handling potential opportunities or adversities can be developed.
It is recommended that at least three scenarios be created in order to facilitate planning and increase its assertiveness. For example, in a positive scenario, what would be the company’s expected revenue and expense structure? In a negative scenario, what is the minimum monthly revenue capable of covering the company’s main fixed and variable expenses? What strategies will the company use to keep its accounts in order if there is a sudden increase in demand or a sharp drop? It is important to keep in mind that there are many possible scenarios and it is necessary to be prepared to deal with them.
Set goals when preparing your annual budget
As in other sectors, it is important for managers to set goals to control the performance of the company’s financial sector when the annual budget is prepared.
When planning finances, a number of variables can be examined, including fixed costs, variable costs, debt ratio, revenue forecasts, and profit margin targets. Nonetheless, it’s critical that the objectives align with the organisational strategy and be reasonable and attainable.
Track the results
It is not enough to define an annual budget, set goals and objectives and only analyze the results achieved in the following year. It is necessary to regularly monitor the results being achieved and create corrective action plans whenever these results are not in line with organizational expectations.
To do so, create indicators and periodically compare the results achieved with the goals set.
Use the appropriate financial management tool
Using good financial management software helps companies organize their finances and assess their actual financial situation. Using the right tool makes it much easier to generate reports, analyze cash flow, and obtain other information that can be crucial for formulating strategies for the coming year.
For example, which product was the best seller last year? Which products performed below average? In which region are the company’s products best accepted? How much was invested in marketing and which media brought the best results?
Answering these and other questions makes it much easier to decide on future investments and maximize the results of each decision.
Analyze the financial movements of the period that is ending
In order to be able to deeply analyze the situation of your finances, it is important that all of the company’s financial transactions have been recorded throughout the year. The use of financial software, in this sense, once again helps the manager to organize entries and access data more easily.
Assuming that all your income and expenses have been duly recorded throughout the year, when creating a good budget for the next year, it is important to analyze the expenses and income incurred.
In which categories did the company spend more than it should have? What factors did these expenses relate to? What were the company’s main sources of revenue? Which products performed best in sales?
Through a detailed analysis of the current financial situation, it is possible to create strategies that optimize the use of the company’s financial resources in the next year.
Cut unnecessary expenses
When the accounts from the previous period are analyzed, the manager becomes aware of several expenses that could have been avoided. These unnecessary expenses can range from wasted office supplies to inefficient company processes.
For example, the company may be paying employees a lot of overtime because their production process is not well structured. Identify unnecessary expenses and make sure they don’t happen again next year.
You can guarantee that your business follows a safe and sustainable growth trajectory by practicing good financial planning. Don’t wait any longer if you haven’t begun creating your company’s annual budget for the following year.
