BUILDING YOUR BUD GET Best Practices in Budgeting for the Craft Distiller
Wr itt en by Jef f Qu int
The Budget’s Place in the Planning Process
Elements of a Good Budget
t has long been said that “failing to plan is the same as planning to fail.” After 35 years in the business world, I’m firmly convinced this is the case. Without a plan, we tend to meander through the years, jumping after every new business opportunity or “shiny object” that catches our eye. Many entrepreneurs are particularly adept at capitalizing on new ideas (and often see it as fun), so we are even more prone than the average person to “fly by the seat of our pants” and get by on our survival skills along the way. However, there is overwhelming evidence that most companies achieving significant success over the long term are those that have consistently had a plan ahead of them and have executed on that plan, deviating from it only in extreme cases where it becomes evident that a new strategy based on new information obtained makes more sense than the one you’ve been working toward. Before we start our discussion on budgeting, there’s one more thing to know about business plans. There’s the annual business plan and then there’s the three- to five-year business plan. They’re different, of course, yet both are very important. A five-year plan will generally provide longterm strategy toward achieving a new position in your market, often stated as a “Big Hairy Audacious Goal,” (BHAG) as made famous by author Jim Collins in his book Built to Last. An annual business plan will then spell out annual goals which you will achieve to move closer and closer toward that long term objective you have in your sights. This is important to grasp, because your budgeting process should be broken down in a similar manner. You would have a five-year financial forecast that supports your five-year business plan as you would an annual budget that supports your annual business plan. While this article is about budgeting, it is important to understand the budget’s role within the bigger picture. The bigger picture is the business plan itself. The budget is a supporting document to the business plan. It’s a form of “checks and balances” that helps you know if you can afford to do the things you want to do in your business plan and it reveals the financial reward that will be yours upon achieving your plans.
The more complete you make your budgeting process each year, the more useful and informative that budget will be. While laying out a pro-forma profit and loss (P&L) for the upcoming year is quite useful, it should only be seen as a bare minimum first step. As we will get into shortly, other important pieces to the budgeting puzzle include:
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Planned case sales, by product and by market, and planned cases to be produced/barreled
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Total headcount, including hire date and total estimated compensation
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Costing computations, to establish what production costs will end up in inventory on the balance sheet and what will run through the P&L
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Capital expenditures, to help determine cash flow needs and debt balances
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Forecasted balance sheets for the beginning and end of the year being budgeted, to determine cash and debt balances
Some of this may seem scary. But if you get yourself to do it once, you’ll see the benefits derived from doing it and it will get easier each successive year. Many people skip the step of forecasting their balance sheets. These are the people most likely to run out of cash. To the extent you are building inventory (e.g., growing your whiskey inventory at a much faster pace than you are currently selling it so you can sell more later without reducing the average age of the whiskey) or expanding your production facility (capital expenditures), you may very well be consuming way more cash than your operation is generating. You want to know this at least a year in advance in order to give yourself adequate time to raise the proper amount of financing. This
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