For many Denver and Colorado business owners the closing months of the year is a time to review performance, make adjustments, and strive to meet established goals. This often means an intensified focus on sales, new service/product development, addressing staffing concerns, or opportunities with vendors and suppliers. A comprehensive review of financial reports helps to guide management’s efforts from pricing strategy and sales process changes to the selection of new vendors. In other words, the fourth quarter can be especially busy.
Yet it is during this same time that management should also be thinking about the coming year. More specifically, it is essential to spend time developing the company’s operating budget. The budget is more than just a financial roadmap, but it helps to guide growth, make informed decisions, and ensures financial stability. The budgeting process can take several weeks depending on the historical data available and the level of detail needed. For this reason, it is important to start the process as early as possible. To help clients, prospects, and others, Whipplewood CPAs has provided a summary of the key details below.
What is an Operating Budget?
An operating budget is a detailed financial plan that outlines a company’s expected revenues and expenses for the coming year. It serves as a roadmap for day-to-day financial operations guiding management on how to allocate resources, set financial goals, and monitor progress.
Key Budget Considerations
- Review Historical Data – Before starting the budgeting process it is essential to understand the company’s current financial standing. Start by examining the income statement, balance sheet and cash flow statements to identify trends, opportunities, and areas of improvement. This information is not only essential as a starting point but also helps to identify where additional focus may be needed in the coming year.
- Identify Goals & Objectives – Clearly define business goals for the coming year. Is the business thinking about expanding operations or increasing profitability? Maybe it will be a year where the focus is on debt reduction. Whatever the desired outcome, the budget should include goals and provide direction on how to reach them. It is important to be specific and realistic when setting financial targets and ensure consistency with the strategic plan.
- Consider Economic & Industry Factors – The impact of inflation and rising interest rates will continue to impact companies across all industries. However, determining how a specific industry will be impacted is especially important. Anticipate how these external factors will impact revenue, expenses, and profitability in the coming year. This helps to ensure financial projects are as accurate as possible.
- Revenue Streams – The budget should include a detailed breakdown of revenue streams. Identify primary sources of income and determine growth potential. Consider how price increases can help offset inflation and supply/material costs. Are there new products/services coming to market which will create a revenue boost? A detailed analysis of revenue opportunities will help to ensure projected growth is realistic and sustainable.
- Expense Planning – Controlling expenses is crucial to maintaining a healthy bottom line. Start by reviewing historical expense data and then layering in practical considerations for the coming year. For example, meeting hiring and recruiting needs could be expensive and generate additional costs in starting bonuses and recruiter commissions. What about rent, supply, and other vendor expenses? If the business has a loan will interest expense increase?
- Cash Flow Projections – Cash is king and maintaining a healthy cash flow is essential to the vitality of the organization. Ensure the budget includes a cash flow projection that accounts for both inflows and outflows. Adequate reserves can help management to navigate unexpected challenges and leverage unexpected opportunities.
Developing an operating budget is an important financial tool that helps guide management throughout the year. A careful review of past performance along with clear goals and a detailed analysis of economic factors, revenue, and expenses, will allow management to create an effective budget. If you have questions about the information outlined above or need assistance with your 2024 budget, Whipplewood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.