As your business grows, the metrics needed to successfully run operations change significantly. While it can be easy to singularly focus on driving profit, many owners overlook the simple fact that as business expands, there is more data being generated with valuable information and metrics that let you know what’s happening. This can be complicated to understand but very important to get a data-driven picture of what’s occurring behind the scenes.
To create an efficient small business budget, it is important to dig into the data to create a budget that is tailored to fit your business and your growth strategy.
These best practices will ensure you stay on track with budgeting, while you continue to focus on growing your business.
Take Ownership of Your Data
Within your company are several KPI (key performance indicator) categories that can be used to chart future success. Hidden underneath these metrics are important insights that can improve your business.
Incorporating this type of data into a business budget planning requires you to evaluate expectations about the budget as well as the reality of what the budget actually is. If you aren’t tracking these KPI’s, you won’t know which questions to ask to improve your business. Before you can drive business success, you must first take ownership of your data. From an operational and financial standpoint, that means to find out which KPIs impact your business the most. The data and KPI’s will be different based on each company’s needs and goals.
To leverage data to drive decision making starts by getting clear about where you’re going, and then assessing past outcomes, such as correctly reading financial statements. Contained within your financial statements are key pieces of data that can be used to make better decisions. Here are a few examples:
First, understanding your cash position for the month will allow you to make better operational decisions. Additionally, a snapshot of your historical information, can help you to better pinpoint which KPIs will impact your future.
True KPI’s are “leading indicators” which let you know how you’re doing before it’s too late to change course. Within your company, each department can tie their department’s KPI’s into organizational wide, higher-level KPI’s. This makes it easier to identify possible disconnects in product or service delivery as well as sales and marketing. The net result is that it will help you to improve decision-making.
Use Your Budget as a Benchmark
Once you have a clear understanding of your financial position provided by your financial statements, you can use this information to plan ahead for the forward-planning side of the business. To do this, use your budget as a benchmark for comparison. To make the most of your budget, compare every month to your actual. Then, ask why your numbers are what they are.
Another part of creating a successful benchmark with your budget is using it to compare your numbers to what is standard for your industry. You can use this information to understand more about your company’s goals for future planning, to see what changes you will need to make to keep up with your competitors. For example, items such as gross profit margin will differ immensely depending on your industry. Tech companies may have a 70% gross profit margin, whereas service companies may have a gross profit margin of 40%.
Know Your Weaknesses
Every company has operational weaknesses yet acknowledging them is critical to ensuring your business meets the standards your customers expect. Often financial performance challenges are usually the result of an operational weakness. If a KPI isn’t met, such as a sales goals, it is important to understand what the root cause is of the missed goal. Once you understand that financial performance is a reflection of operational KPI’s, it empowers you to reach your goals.
Since financial performance is a result of what’s happening day-to-day inside the operations, the better you measure operational goals, the easier it will be to hit goals and plan for the future.
For example, rather than asking why we didn’t meet a profit goal, dig into the KPI’s. Did we not hit our sales target, and if not, was it because we didn’t have enough leads, or the leads didn’t convert? On the operations side, if we didn’t hit a profit goal is it because costs were too high, or we had performance issues that required the team to issue refunds or credits? This type of analysis will help you understand what happened operationally, to better understand where the company needs to go in the future.
Net Income vs. Operating Cash Flow
As a final piece of advice, it is important to understand that positive net income does not equal positive cash flow. Many business owners conflate net income as being the same thing as operating cash flow. However, they are very different. It is possible for your business to have positive net income and simultaneously have negative operating cash flow, which can be catastrophic when a company is scaling.
Many business owners fall into this trap because they don’t address simple changes like collecting on receivables in a timely manner. This problem is frequently seen in tech companies because they have high research and development costs that might not show on their Profit and Loss statement. In a manufacturing or retail business that has inventory, negative cash flow can occur when the business acquires too much inventory before they are able to sell it.
This can be an immensely dangerous position for a company to be in because they think they are profitable but actually are in dire need of cash. For these reasons, it is incredibly important that your business prioritize diving into your numbers to understand key performance metrics that drive the growth of your business so that you can prepare for the future.
Tentho Can Help with Your Small Business Budget
Tentho assists clients with everything their business needs from an accounting standpoint. Tentho is a team of highly skilled experts who can help you to gain a better understanding of how your numbers relate to your operational efficiency. Their capable team of financial experts is ready to answer any budgeting questions you may have and are happy to pass along their expert industry-leading knowledge to you. Tentho encourages business owners to plan for future business needs, such as strategically scaling your business. Schedule your free consultation today to connect with our experts and let us help you improve your financial outlook.