Creating a Budget for 2027 Starts NOW!

By Dave Costello, MBA, CPA, Financial Leadership Partner at TCV

Yeah, yeah, I know.  I can just hear you saying “C’mon, Dave!  We haven’t finished Q3 yet and we’re in the midst of a big push to finish the year strong”!!

Well, congratulations!  That’s exactly what you should be doing.  But if you don’t start working on your budget NOW you’ll never have it finished by January 1, 2027.  And if you don’t have a plan for what you want to achieve in 2027, it may never get off the ground.

Being the fractional CFO nerd that I am, I listened to Fed Chair Kevin Warsh’s speech at the Jackson Hole Economic Symposium last month.  Interestingly, he quoted Chuck Yeager, the famous test pilot.  One of Chuck Yeager’s sayings, quoted by Fed Chair Warsh, is “At the moment of truth, there are either reasons or results”.  Fed Chair Warsh connected that statement to the Fed’s dual mandate to promote maximum employment and control prices. 

But I think the Yeager statement can be applied to most business situations as well!  For example, are you going to have your 2027 budget ready by January 1, 2027, including making sure that everyone on your team knows what their roles and expectations are with respect to 2027 performance?  On January 1, 2027, we will be at your moment of truth!!  Will you provide reasons?  Or will you produce results?

One of my fractional CFO engagements began as an engagement to help a company put together a budget.  It isn’t that hard to do.  You do need to focus some attention on the work to get it finished, but its not hard work.  It just takes focus and a bit of time.  With my guidance I was able to help the company complete a budget within a 4-week period.   It did not take 4 weeks of time to complete the budget, but over a 4-week period working collaboratively we got it done!  The company approved the budget, loaded it into their accounting system, and used the budget to manage and assess their performance as they went through the next fiscal year.

So if you need help putting a budget together get in touch with me!  I can help you and we will have it finished before January 1, 2027.  I’ve done it before and I can help you do it too!

If you want to try it on your own, then here’s the blueprint.

Step 1:

Assess your performance through August. 

• Were revenues where you thought they would or should be?  What drove them?

• Was your bottom line what you had expected?  What happened that you didn’t expect?

• Were your margins, both gross profit margin and net profit margin, adequate for the effort you put forth?  Were they consistent with industry benchmarks?

• What would you have done differently looking back over the year if you had a time machine?

• Are you satisfied with your team?  Were they cohesive in their efforts or were there areas that needed improvement?

Step 2:

Once you have a handle on your company’s performance for the past year, ask yourself about expectations for next year.

• What kind of percentage increase in sales do I want to achieve next year over last year?

• Do I currently have the ability to produce the products or services needed or do I have the staff needed in order to achieve those higher sales?  If not, what do I need to do to improve product manufacturing, purchasing for distribution, marketing and sales, or how many staff members do I need to add?

• Are there any external factors that I need to consider that I expect may impact my business next year?  Are my supply channels sufficient, do I think there’s potential for higher staff turnover, do I have the right management team in place, is the market for my product or service growing or declining, is the economic environment going to decline as I’m trying to grow?

• Do I have enough cash or access to cash to finance my business?

• What do I want my gross profit margin and net profit margin to be next year?  Is that enough of a payday for you?

Step 3:

This step gets a little geeky for us numbers folks, but here’s where I would start:

• Put together a salary budget with existing staff and expected additions to staff.  This is pretty easy.  Just list the people who work for you, list their annual salary, calculate any salary increases you anticipate, and spread the results over the next year.  Remember that how you pay people potentially impacts each month’s expenses.  If you pay twice a month or monthly that’s easy to spread.  If you pay every two weeks you will have two months with three pays in the month and ten months with two pays.  Make sure you figure this out ahead of time.

• Next calculate your average sales of the last quarter or last six months and use that as a basis for the starting point for next year’s sales.  Make sure the period you use is representative of normal levels of sales.  This may be more difficult if your sales are seasonal for any reason.  It also becomes more difficult if you have more than one product line that you sell.  You will want to assess this for all product lines.  Using the above as the basis for calculating future sales, figure out how much growth in sales you want to achieve and think you can achieve.  It’s probably better to calculate a monthly increase in sales so that you plan to achieve a growth trend over your next budget year.  This sounds complicated, but it’s really not that hard.

• Make the same calculation for your regular operating expenses.  Start with the average of a past reasonable period, consider what will impact that expense item in the next year, and factor that into the calculations for next year’s expense.  For example, if your company leases its space you know when the rent is going to increase.  In general you should build in expense increases on an annual basis of 3% to 5%, maybe more in certain types of expenses like health insurance.

• Are there any new expenses that need to be added into the expense budget for the next budget year?  Add them in if there are.  You might be considering using a fractional CFO to help you better understand what your numbers are telling you, or you might feel the need for an outsourced human resource professional to help address staffing issues you may be having.  Build them into your budget if you are considering doing this.  It doesn’t mean you have to do it, but you will have anticipated them in your budget if you decide to move forward.

• Finally, add up the revenues and expenses and see what it looks like in your income statement.  Segregate costs between Cost of Goods Sold for those expenses that are tied directly to sales and administrative expenses for those that support the overall running of the business.  This should be identified in your Chart of Accounts.

  
  

Step 4:

Step back and evaluate the results.  Make sure you calculate the Gross Profit Margin by month or by quarter along with your Net Profit Margin.  Is it enough?  Are they representative of the industry your business operates in?  If you aren’t satisfied with the result revisit Step 3 and make changes until you are satisfied with the result and believe it is reasonable and achievable.  Once you are satisfied make sure your key management team members know what their role is in achieving this budget for next year.

Step 5:

Load your budget by month into your accounting software.  One of the key benefits of having a budget is the information you get by doing a monthly or quarterly actual to budget comparison.  This comparison lets you know if you are on track or off track and by how much and gives you the opportunity to make changes in your operations to get back on track or to exceed expectations as you go through the year.

Step 6:

Consider whether or not you need a cash flow forecast.  Your income statement captures those transactions that generally result from your business.  But if you have sizable balances on your balance sheet for accounts receivable or inventories or fixed assets, then you might want to consider a cash flow forecast.  The accounts receivable portfolio needs to be managed closely to ensure that your customers are paying you timely.  If you have inventories on your balance sheet then you are going to spend money to acquire inventory prior to generating a sale of that inventory for your business.  Understanding your cash needs and cash flows will definitely help you sleep better at night.

Step 7:

If you don’t have a bank line of credit consider putting one in place.  Its easier to get one when you don’t need it than it is when you do need it.  Planning ahead is the key.

That’s it!  Pretty easy, right?  This is certainly something you can do before January 1, 2027, so that you will provide results, not reasons.

If you still think you need help reach out to me at dave@tcv-growth.partners.  I’m here to assist!