Most people hate following budgets and think forecasting is for psychics. I used to think this and did both of these exercises because I had to, not because I was enthusiastic.
For a visionary entrepreneur this feels like it is like putting a box around you. How can you Manifast your vision if you are constrained from spending when you want to?
How many of you use a budget to plan your home spending? I would guess that less than 10% of people actually rigidly follow a budget and half those are doing so because they are forced to.
Budgets limit your spending, right?
Wrong. Wrong. Wrong.
That is only true if your income is fixed.
In business your goal is to increase your income. Dramatically!
In business your budget is your plan for funding the increase in your income AND determining how much profit you will make.
Profit is the part you can keep or reinvest to fund more growth.
Your budget is your financial plan that goes with the rest of your business plan.
Now this is the best part... your budget drives how much growth you want in your income and profit.
When you think "Definiteness in Purpose" this is where you get specific. The more specific you are and the more you focus on achieve your numbers, the better chance you have of succeeding.
Remember, your budget drives how much you want to grow.
It does not need to be restrained. It is as big as your goals and dreams.
You just need to consistently make more than you spend. Grow your revenue and manage your expenses relative to the growth.
Want to spend more? Make more. Invest in the growth.
Unlike a home budget, income is a bigger variable in a business.
Thus unrestrained budgeting.
Your Score Card
The important part of the budget ends up in your measuring system or Key Performance Indicators (KPIs). In Manifast we keep track of your numbers in monthly and yearly buckets. We track three numbers:
- Budget: What you want the numbers to be at the beginning of the planning cycle or year.
- Actual: What the actual numbers are each month and year, after the fact.
- Forecast: What we think they are going to be as we get closer to the actual time-frame. More on this later.
Variance is Actual minus Budget. A lot of people use this number but it doesn't tell you anything new and is historical so we don't focus on it. You can only focus on so many things.
KPIs are a mix of forward looking and rear view mirror measures that are important to your business and cover all aspects of your business. Picking the right ones is a whole other subject.
How many people do we need next month to provide great service to our clients? Will we be able to pay our expense? Do we need to put more into marketing or sales?
The budget is the plan. But plans don't go according to plan.
Forecasting is your ability to adjust your plan on the fly. It allows you to make better decisions more quickly and with less guessing.
It is a skill that requires practice. Lots of practice.
It should involve your entire team. Why on earth would you take all the responsibility for everything on your shoulders? Your team is closer to the action.
But the purpose of forecasting is not really to just predict the future.
The real purpose of forecasting is to predict the future so you can change it.
Like time travelling or science fiction. But real world stuff.
The best companies do this well.
The Dynamic Duo
- First build an Unrestrained Budget,
- Next Forecast Accurately on an ongoing basis,
- Then adjust the plan to get back on track,
- Sit back and watch the actuals come in above or on budget.
Your unbeatable team of unrestrained budget and accurate forecasting.