Budgeting and Forecasting, an exact science or a finger in the air guesstimate?

As we enter the last quarter of FY25, the two burning questions for all business owners are “Where will this financial year land?” and “What can I expect from next year?”.

As you wrestle with answers as to why this year is so far off the target you set last July, your confidence in picking the right target for next year has taken a beating.

One of the biggest traps we fall into as business owners is setting a revenue only target with no detailed thought put into the corresponding margin or profit target attached to it. We are programmed to think more revenue means progress and success and along the way, more profit. I have seen businesses miss revenue targets and still hit profitability targets or miss revenue and profitability targets and still successfully finish with a much healthier balance sheet and more valuable business than what they had at the start of the year. Effective management of your assets and your working capital is as critical as your profitability target

Don’t fall into the trap of setting one figure/set of figures as your annual target and stopping there.  

 Very often we set an annual revenue, margin, expenses and profit target and the work stops there, with an overly simplistic “divide it by 12” rule to work out the monthly targets.  This leads to complacency and a dip in motivation as the new financial year rolls with your team thinking “I’ve got a full 12 months to deliver that”. Breaking the budget down into quarters, months and even weeks using historical seasonality, the estimated lead time on key sales initiatives kicking in, coupled with information on phasing of start dates of new team members is a critical exercise to be completed prior to signing off your budget for the year, if you are going to commit to a number and genuinely hold yourself and your team accountable for hitting it.

Delegate responsibility and drive accountability.

Each team member has the ability to influence multiple lines on your profit and loss. Your sales team can impact your revenue, discounts and commission expense line. Your procurement team can influence your cost of sales line. The combined effort of these teams delivers your margin. Your operations team can influence your distribution cost lines and your back-office support teams influence your expense lines. Giving each of these team’s clear responsibility for the lines they can impact and holding them accountable for delivering the monthly, and quarterly budget is what delivers results.

The budget cannot remain as an aspirational target set by the business owner or the finance manager, it needs to be owned by the entire team.

Bring your leadership team into the process early. Give them ownership of what they can influence and impact, revenue and margin for a particular product range, expense lines for a particular function, payroll costs for the team they manage.