Why is budgeting important?
An annual plan with a detailed budget is your company's financial compass and sets the guardrails for every business decision. It answers key questions such as "Can I afford to hire one more person now?" or "How much can we spend on online marketing?" With this financial compass, you can make well-founded decisions about how to allocate resources, track revenue milestones and control spending – all within a centrally developed plan. Investors also see your budget as proof of your ability to set and achieve business goals. With a detailed annual plan, the likelihood of securing follow-on or additional funding from existing or new investors is significantly higher than without one – even in challenging market conditions.
As a specialist provider of CFO services, we also offer free templates to help you and your company navigate your finances with confidence. You can download our annual planning template free of charge via the link below. If you would like advice on your annual plan or budget, your first consultation with us is also free.
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Annual planning in 3 steps
1. Gather the key data from your last or current financial year
From experience, we know the most important data sources for business planning, and we provide a checklist here. We focus on the essential data and show the simplest approach for start-ups and SMEs.
Data sources for annual planning
2. Involve your team
Involve your managers and heads of department so that they can form an early picture of hiring, product planning and resource requirements. This ensures that the budget is aligned with your company's goals. Review your most important KPIs at this stage:
- Are the parameters correct?
- Are current trends still valid? Are there new trends in your marketing activities?
- How are revenue, cost of goods sold and total costs developing?
- Have there been any unexpected anomalies that should be taken into account in the coming annual plan?
3. Set realistic targets in light of the market environment
Base your budget on achievable revenue and growth targets. Take market trends, competition and financial constraints into account in order to produce reliable financial forecasts. Thorough research – both within your company and of the market – is key.
Step-by-step guide to building your plan
Overall, we recommend using simple calculation logic and populating it with carefully checked parameters.
Revenue planning
Identify your company's revenue streams and the channels through which you acquire customers. Model the key metrics that drive revenue in order to guide resource allocation. For example, if your online marketing generated a lower ROI than your sales team in 2023, you could plan to increase the sales budget rather than the online marketing budget. At revenue level in particular, we recommend keeping an up-to-date, ongoing commentary on the plan so that you have a ready starting point for discussing your annual strategy with investors.
Recommendation: Keep the marginal returns of your marketing channels in mind.
For most companies, we recommend planning on the basis of sales capacity. In practice, this means planning your resources per sales channel and estimating the number of customers using leads per euro or per FTE. Average order values or basket sizes can usually be found quickly. Important: your order backlog and active leads should be flagged separately from planned business that is not yet in your CRM or similar system. This type of planning builds the most trust with investors.
Recommendation: Do not plan revenue without considering your operational capacity limits.
- For agencies, billable hours should match available capacity.
- For manufacturers, current output volumes and units sold must match – or further investment must be planned.
- For retailers, delivery lead times must be taken into account.
Cost management
Identify the costs associated with sales, such as inventory and payment processing. Make sure your pricing and costs support healthy gross margins and sustainable economics as you scale. The devil is in the detail here: if you plan by product line, bear in mind the impact of each line on profitability.
Recommendation: When planning your average basket, use a product mix and estimate direct costs on that basis.
Operating budget
Categorise your fixed expenses – from salaries to marketing costs. Estimate costs using industry benchmarks and supplier quotes, and refer back to your annual financial statements. Do not plan against trends without good reason. If Instagram conversions and CPCs have been rising for 24 months, a reversal of the trend is possible, but it should be plausibly explained.
Recommendation: Keep an eye on your recruiting costs. With the current shortage of skilled workers, a good hire is often more expensive than in previous years.
Investments
Take one-off capital investments into account, for example for equipment or office fit-out. Estimate the costs based on your business needs and growth strategy.
Recommendation: Do not think only of physical assets when it comes to investments. Software, training programmes and consultants for process improvement cannot all be capitalised, but they still represent significant one-off expenses.
Small items
Especially when companies have limited historical figures, there are often costs that scale with cost of goods sold or revenue. Because these costs scale with operating activity, they have a major impact on earnings and liquidity. Examples of scaling costs include:
- Payment processing costs, which scale with revenue
- Customs duties, which scale with cost of goods sold
- Commissions, which scale with revenue
Recommendation: Calculate your net revenue and make sure that full costing has been applied. On the one hand, you need to ensure that all scaling costs are included in production costs. On the other hand, you must avoid full costing that includes items which are then added again in overheads.
Cash flow monitoring
Maintaining healthy cash flow is of central importance for most SMEs and is fundamental to calculating the burn rate for start-ups. A typical problem in annual planning is large inflows and outflows that arrive all at once, fail to materialise or are delayed.
Recommendation: Stress-test large incoming payments and forecast your liquidity on the assumption that they arrive two months later than planned.
Implement strategies for forecasting and managing cash flow, including monitoring receivables and payables. It is precisely these open items that make monitoring between month-ends difficult.
The purpose of the annual budget
In our planning meetings, we regularly find that managing directors can start planning their first strategic measures while revenue and cost drivers are still being discussed. Annual planning is often more work than expected, but it also amounts to comprehensive strategic planning for the year ahead.
Once the annual plan is complete, we recommend two rounds of presentation and discussion:
- First, with external funders. Committing to an annual plan gives everyone involved certainty, allowing managing directors to focus fully on execution.
- Second, the plan should be discussed with heads of department and team leads. A plan and a target for revenue and profitability are the foundation for autonomous yet goal-oriented team leadership. This combines perfectly with goal-setting frameworks such as OKRs.
Review your budget regularly with a budget-versus-actual comparison. Assess how resources are allocated to support revenue growth and analyse key metrics such as customer acquisition costs and utilisation. For our clients, we maintain two plans:
- Annual plan
- Rolling forecast
The annual plan forms the basis for the budget-versus-actual comparison. The rolling forecast is crucial for managing investor expectations.
Budget template for your company
To make your budgeting process easier, we offer a downloadable template. It contains preset formulas and categories for income and expenses, while giving you the flexibility to adapt it to your specific business needs.
Would you like to find out more? Book your free budget planning session with one of our experts.
