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You got to work this morning, and that annual budgeting email finally landed in your inbox. Or worse, maybe you are the one who had to send that email to the team. Whether you are the sender or receiver, brainstorming what to ask for in next year’s budget can actually be fun.
Yes, I said fun.
Budgets don’t have to be painful exercises. They are an excellent opportunity to exercise creative thinking, vet ideas, and get alignment around company goals for the upcoming year. If you are in sales, service, marketing, or operations, this message is for you. Let's walk you through the steps to brainstorm ideas for your annual budget. I’m going to bust some myths around budgeting that are probably holding you back from your best year yet, and finally, I’m going to walk you through the exact steps you need to take to vet your budget before presenting it to the rest of your team.
Did you know that nearly two-thirds of small businesses don’t have a budget? Yikes! And the ones that do - well - we know how this story goes. You or your boss sends out an email to every department head asking for each department's proposed budget items for the next year. If you’ve created one of these before, you dig it out from your sent mail from this time last year, you change the date, do a cursory look over the numbers, and increase the budget by a percentage - an amount that doesn’t look too greedy but also doesn’t shrink your budget. You turn it in and move on to the next task.
But what if budgeting was - dare I say it - fun? Why leave all the creativity to the accountants?
Budgeting should be a signal to dream up possibilities for your department and company for the following year. If you are going to do cost-plus budgeting, you are missing out on the exercise to grow your company. This year, let's reimagine how you react to that budget email.
Step one is getting the email! If you are responsible in your company for initiating the conversation, you should do so 3-4 months before the fiscal year begins. Depending on the type of built-environment company you are - and who your clients are - dictates your fiscal year. Most companies run on the traditional calendar year of January through December, but you may choose the alternative July to June fiscal year.
When sending out the call for budgets, you should also share large company goals for the next year and focus areas. Ideally, these items are measurable and not vague. Examples include:
If you are responsible for creating the suggested department budget and this information isn’t provided, ask for it. You will want to align your department’s budget asks to the company’s incentives. Hint - this is an easy way to justify any new or increased asks!
When I start brainstorming budget ideas, I like to use a brainstorming framework that doesn’t limit my creativity. You can use whatever tools you prefer, traditional or digital. You might want to use a whiteboard or notebook. Maybe you love spreadsheets or documents. Doesn’t matter - all of those tools are great for capturing your ideas.
I like to avoid digital distractions when brainstorming, so I use my planner, which includes a notebook section. I block off my calendar for a good hour, silence notifications, and treat myself to a hot cup of tea. I divide my notebook pages into sections. At the top of each section, I place one of the company goals I need to align. I’d divide a notebook page into three columns and write “Increasing sales by 5%," "Decreasing overhead by 8%," and "Increasing our utilization rate by 10 basis points” at the top of each column. Then, I would start brainstorming all my ideas that aligned with those three goals, writing any and all ideas in each respective column.
Now, don’t self-edit! There is plenty of time to bring reality to your budget later. Right now, you must focus on possibilities, not an impossibility mindset. Embrace your inner Ted Lasso.
Want a pro tip? You can do this year-round to make next year’s budgeting exercise even more manageable: I keep a running brainstorm tab in my notebook all year and jot ideas as they come to me for consideration later. There is a good chance that if you wrote down a great idea 6 months ago and the idea still makes sense, it's a good one you should pursue proposing.
Now, what happens if you are stuck and you need a little inspiration to get your ideas flowing? Here is another approach for those who struggle to generate ideas - I call this the problem/solution framework.
Maybe you are one of those “I know it when I see it” types. You are good at communicating the issues or what you don’t like - but dreaming up new approaches isn’t your cup of tea. That’s okay; lean into your strength as a problem identifier.
Use the same framework - the columns with the company goals at the top. Instead of jumping feet first into ideas, write down things you identify as holding the company back from achieving those goals. In this case, it's okay to embrace your inner critic. List out every impediment you see standing in the way of the goals the company has set out to achieve.
An example - you’ve identified that one of the things holding back the company from achieving 5% more in sales is quality sales leads.
Another example is that you’ve identified that increasing contractor costs contributes to increasing company overhead costs.
You will want to leave some space under each challenge you identify for the next step. Once you have all the challenges listed out, you can now list underneath the challenge (or next to it if you are a spreadsheet lover) suggested solutions that would remove that challenge and advance toward the goal.
Let's go back to our examples:
If you identified a lack of quality leads, a proposed solution might be implementing a lead-scoring program in your company’s CRM. Or evaluate the forms on your website to see if you can add lead-qualifying questions to surface better quality leads quickly.
For our increasing contractor costs, you could suggest negotiating bulk rates with contractors, alternative payment policies, or simply shopping the rate for new contractors.
Using the challenge/solution framework, you’ve taken something identified as a negative and turned it into an opportunity.
The most common myth that I hear about budgeting is:
The next most common budgeting myth I hear is
The last myth budget myth I hear is
Now that I’ve convinced you budgeting can be fun and we have an entire list of ideas, let's break down how you take your list of ideas and transform it into a draft budget faster than a caffeine buzz at 3 in the afternoon.
First, grab last year’s account details.
In order to create a budget suggestion, you need to see where your money’s been going, even if it's just one giant line item that says "sales" or "marketing". Get a detail of every expense coded to that line and organize it into basic categories. If you’ve never created a budget before here's a great resource.
Next, you need to rank your budgeting ideas from your brainstorm. I really like the 80/20 rule when it comes to making ranking decisions easy and unemotional. The 80/20 is Prato’s law, which simply assigns two data points to each of your ideas. You grade how hard the idea is to implement and how much impact it will have. You don’t have to make this rocket science - just use a simple system such as A, B, C, or Small, Medium, or Large for your ranking. Once you do that, sort all your ideas by the highest impact followed by the easiest implementation. Ideally, you’ve converted your ideas to a spreadsheet, so this is a simple sort function. The spreadsheet then does all the work!
Now, all that is left is to assign estimated hard and soft costs to your ideas on the spreadsheet and add your ideas to the budget line item categories you created.
Why hard and soft costs? Hard costs are things like purchasing software or hiring a consultant or firm. Soft costs are things like employee time. While hard costs go into the traditional budget, it's good also to know the soft costs of your proposed items since time is a finite thing and part of overhead. If you are creating a time cost for a new program, that means it's likely taking time from another program. Management will need to weigh the decision of the idea based on both hard and soft costs.
Let's walk through a quick example so you feel really good about creating your draft budget and presenting it with new proposed ideas for next year.
Take the idea we had around increasing the company’s leads by 5% by addressing the quality of the leads. Your proposed solution was to implement lead scoring in the company’s CRM. Let's pretend you have a CRM like HubSpot, which has lead scoring backed right in. - which has lead scoring backed right in. If that's the case there are no additional hard costs involving software. Let's determine that you don’t have the expertise in-house to implement lead scoring, so you suggest hiring an outside expert to help. That would be considered a hard cost for your budget. You are going to incur soft costs too to manage the expert and provide them with the information they require to get the job done.
When you rank this idea, you see it as a small project, and having new lead scoring data will increase the likelihood that sales spend time with higher qualified leads, hopefully surfacing more opportunities that close, getting you closer to that 5% increase in sales. So you rank the impact of the project as high. Using the 80/20 rule - that's 80% of the results from 20% of the work - we know that this is a good project to propose because it will have a lot of impact on the size of the investment.
By using this framework to create your budget, you have the justification baked right in! Volia! You now have a draft suggested budget that aligns with the company goals. Now sit back and watch your budget and company grow.