Annual Financial Budgeting (Budget, Don’t Fudge It)

The end of the year is always a great chance to look back and reflect on what had happened—and also look ahead to the New Year.  Budgeting is a significant, but often over-looked, step in managing a business.  We’ve assembled the following framework to assist operators with the budgeting process.  The framework consists of three components: reviewing, forecasting, and implementing.

Reviewing:

When preparing a new annual budget, one must first start with reviewing the competition and economic environment, and the previous year’s sales and expenses.  First, we will focus on the enterprise’s own historic information.

Sales and Expenses

For enterprises open more than a year, it is important to compare last year’s sales and expenses to the previous year’s sales.  Take note of what the changes look like, and how the business performed in non-financial metrics over the period.  Sales might be increasing rapidly, and costs kept low; but, the business might have been understaffed.  Perhaps sales have decreased and food cost has increased, which might reveal a high-level of waste or unhappy guests.  

Dig into this data and understand what happened and why.  This gives management a comparative look at sales performance and expenses and informs the next step—forecasting.

Competitive and Economic Landscape

Foodservice businesses are especially subject to external factors, such as increasing labor costs, new businesses entering the market, and fluctuating costs of goods.  Thus, it is important for management to take a close look at the greater market forces when preparing the budget.  We suggest focusing on competition and the economic landscape, as these are guaranteed to be dynamic year after year.

1. Competition: The competitive landscape is always changing with new entrants and exits.  It is key to review the current and known-future players and plan a strategy.  Perhaps you will want to allocate more money to a marketing budget in the New Year.  Or, perhaps you could capitalize on another’s success by finding synergies, such as utilizing your facility to co-pack for another.  

1. Economic Landscape: Secondly, the economic landscape is always going to throw multiple curveballs.  For example, New York City has a very healthy economy currently—but the state is implementing massive increases to hourly labor.  So, an operator could expect sales to increase as a result of more disposable income in the market, but labor costs will rise as well, unless a strategy is implemented to off-set them.  

Forecasting

Once you’ve done the heavy lifting with reviewing and research, the next step is to forecast.  Using what you’ve gathered, project (guess reasonably!) the monthly sales and expenses by month for the next year.  

When forecasting, it is important to keep the following in mind:

1. Seasonality: Every business has a degree of seasonality (the holidays are unavoidable.) So, be sure to plan accordingly, as this will definitely affect your cash position.
2. Cash Position:  An enterprise’s cash position will, in many ways, dictate what freedom it has for changes in operations or capital expenses.  As such, keep your cash flow in mind; for example, if January is historically a lean month, don’t plan on hiring that new hot-shot sales manager, or buying-outright that new cookie depositor.
3. Growth Avenues: Does this actually make sense? It’s very rarely safe to think your business will quadruple sales in 12 months, or that labor cost will remain completely flat!

Implementing

Lastly, the budget is only as useful as you make it.  So, don’t throw all of your work away and charge into the New Year with disregard for the budget you built.  We always do the following with our clients to ensure we’re getting the most from our budgets:

1. Use it Monthly: You built the budget monthly, so you should use it monthly.  Reviewing monthly will help you catch major discrepancies and steer your business accordingly.
2. Calculate Variances: When comparing our budgets to actual performance, we determine exactly how much difference there was.  This can help us understand changes in costs and sales. For example, if we’ve budgeted for 33% labor cost, but our actual is 36%, we flag it.  Whether sales are up, down, or flat, we know that that difference in percentage represents something we need to investigate and get control of.
3. Track Variances to Budget:  Once we’ve calculated and investigated the variances, we take notes—to understand in the present and to plan for next year.  

Annual budgets are difficult, mammoth projects—but worth the time and effort and every Excel worksheet.  Just as important as creating the budget is creating an accurate one, and we’re here to help!