A manager is emailed the company’s budget for this year and he looks at it with a smile. He files it away into the Budget folder. “Finally, we’re done with that for another year,” he says. Traditionally, budgets are completed once a year and forgotten about. In today’s rapidly changing business environment, “set it and forget” won’t cut it. Without updating your budget regularly, a business is throwing potential profits right out the window. Like gas fuels your car, cash flow fuels your business and your lifestyle. Don’t you want to get the most possible cash flow from your business?
A rolling budget is a continuous budget. Many companies utilize rolling budgets to keep a more updated version of their budget to better reflect their business. (Read more information on rolling budgets here) Instead of completing one’s annual budget and forgetting it, rolling budgets are reevaluated continuously throughout the year. Most that utilize this practice reevaluate their budget every month or quarter. Rolling budgets require more effort to update than a static budget but are worth it. They reflect the business and the environment much more accurately. Technology changes at a rapid rate. Consumer behavior changes at a rapid rate. BUSINESS changes at a rapid rate. Don’t you want your budget to reflect that? Take the past year for an example. Many companies rolled out their annual budget on January 1, 2020, excited about the upcoming year. They believed their accountants and accounting software have put together a budget that will accurately predict their 2020 performance. They were ready to set it and forget it. In only a few weeks, news of the virus hit and these companies had to realize their static budget wasn’t going to work out. Clearly, this is a dramatic example. A pandemic was a very rare experience. Still, external challenges will arise, and predictions never pan out exactly. Rolling budgets will better adapt to these challenges. Static budgets don’t reflect the business as it is. The longer it has been since the budget has been updated, the less it reflects the business. Think of yourself. If you try and evaluate your plans for the next year, you may believe you have a reasonable prediction of how it will go. However, we all know that unexpected opportunities arise and new challenges are always popping up. In a very short time, the trajectory of your year will drastically change.
The true power of budgeting lies in optimizing cash flow. Budgets reveal your hidden profits. Think your business doesn’t have profit leaks? Think again. EVERY business has them! With outdated, static budgets, you will only realize profit leaks once a year. They will become much more likely. Once a profit leak begins, the longer it goes without being plugged, the more costly it becomes. Companies with rolling budgets evaluate their spending more frequently and avoid profit leaks. A dollar in new sales puts ten to twenty cents in your pocket. Once. A dollar of plugged profit leaks puts a dollar in your pocket, year after year after year. Plugged profit leaks also lead to increased profit margins. Now, every dollar you earn puts thirty centers into your pocket instead of twenty. Rolling budgets lead to increased profit margins and more valuable businesses. Contact me to explore how you can use a budget and rolling forecast to fill your pockets with more cash. Another power tip for small business owners and their advisors from JBVal.