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The core elements of Annual Planning & Budgeting

budget planning Sep 28, 2023

As a business owner, most days are spent dealing with the problem right in front of you.

I get it. I don’t blame you. It’s hard to balance everything and the customer complaint is more important today.

But you need a plan.

And while not having a plan won’t mean your business will fail, it can certainly hold you back from bigger strategic moves.

Consistently failing to plan ahead can ultimately slow or stop business growth.

A friend I know (let’s call him Smiley) had a widget business. By all metrics, he was successful. No matter how much I talked with him, he would never sit down and take the time to create a long-term plan.

As opportunities came, he evaluated them one by one. Does this look good? How hard will it be? Can I afford the investment?

It worked and it was honestly hard to argue with.

Then one day he came to me and talked about the acquisition target he was evaluating (let’s call it Meh Corporation). I looked at the fundamentals and thought it looked like a good deal, but it was slightly out his current clientele.

I asked: who is the ultimate client you want to serve?

He outlined what that client looked like and acknowledged the opportunity with Meh Corporation was slightly outside this description.

I offered to assist as they continued on in due diligence and we parted ways.

Months later, having not heard from him, I reached out.

They’d chosen to go forward with the acquisition of Meh Corporation and Smiley wasn’t smiling (I chose that name just for that line).

The systems they had set up weren’t working and the integration was failing. They thought they were going to have to fire some key staff. He was stressed and discouraged.

You know what makes matters worse?

After they’d closed with Meh Corporation, one of their closest competitors (let’s call it Joe Bob’s Beautiful Business) approached them and he said he wanted out. They wanted to sell.

But, because of the previous acquisition of Meh Corporation, they couldn’t make the numbers work with Joe Bob’s Beautiful Business.

You know what makes it even worse?

The previous year Joe Bob had told my friend, Smiley, he was considering retiring.

Smiley was embarrassed as he told me this. He felt like a business failure.

While I can’t know what would have happened in annual planning, I can guarantee they would have talked about potential acquisition targets.

If they talked acquisition targets, the owner would have reviewed those notes (and that annual plan) before taking on the acquisition.

I don’t know if the acquisition of Meh Corporation worked out. I’m assuming it did and it will.

But it made business hard. It made Smiley stop smiling.

And while I can’t guarantee Joe Bob’s Beautiful Business would have made Smiley smile, we can know he would have smiled, with his head held high, knowing he did all he could to make the best decision.

And that’s exactly what an annual plan and budget is: it’s setting your business up for resilience. To make better decisions one day at a time.

So, over the next 6-8 weeks we’re going to break down the process:

  1. Strategic Planning: Think 3, 5, 10 years down the road. What is the vision for the business as it current stands and what are new initiatives we could adopt to achieve a new future?
  2. Operating & Capital Budget: Once we’ve put some things on paper, it’s time to put numbers to it. The operating budget is what our expenses will be for business operations, whereas the capital budget is where we talk about long-term investments. We incorporate some of the strategic planning ideas in both, but make sure we clearly delineate those so decision makers know the true cost.
  3. Forecasting: By incorporating marketing and the strategic plan, we attempt to forecast 2024 revenue. This will further inform operating and capital budget needs, plus start to help us formulate the goals we set for the whole company.
  4. Planning: This is where the rubber meets the road. We take each of the previous elements and start to decide what we’ll move forward with versus what we won’t. This is a tough, but necessary, process that forces hard decisions.
  5. Goals/KPIs: Once the plan is in place, we need to develop goals and the related KPIs to track our progress towards our goals and plan. We then establish a rhythm for reviewing these KPIs so the whole process impacts our day to day decisions and actions.

My goal is that by the end you’ll have an extensive guide to use to plan for 2024. Some will use it in whole, others will take bits and pieces.

I know I’m not a business genius, but I’ve been through this process a few times.

My hope is that my experience and thought process will reveal a few small ways to make your business better, more resilient, and more profitable.

So here is your chance: what questions do you have? Reply to this email and I can incorporate the questions and feedback into my issues.

Ok, that’s it for today. We’ll be diving in next week!


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