Though the year is rapidly coming to a close, it’s not time to put those out of office messages up just yet. In fact, before we wrap up 2021, it’s imperative to the success of organizations to set the budget for 2022. Finalizing the budget for the new year essentially marks a starting point – a place from which to build goals and more strategic business plans. With a budget in place, organizations can begin the new year on the right foot.
If you’re suddenly realizing you haven’t solidified your 2022 budget yet, don’t panic; there's still time! Here are a few things you should be thinking about when it comes to creating and finalizing your annual budget, and why you shouldn’t wait too long to get started.
Many companies assume that creating a budget means looking back at their performance over the past year. But budget creation is about more than recognizing fixed and variable expenses. It’s about having a firm grasp on the strategic direction for your company, and an idea of how to get there.
Defining this direction as effectively as possible requires a bit of research. Consider exploring SaaS benchmarks and what similar companies are doing to help you identify where unexpected expenses may arise and, therefore, what you may need to plan for.
This additional research will also help you set realistic expectations by benchmarking your growth projections against the industry. Sure, no two software companies are alike, but sites like OpenView, SaaS Capital, and BareMetrics can give you a window into your peers’ numbers so you can establish your own milestones.
And, while you’re in the early stage of creating your budget, don’t forget to loop in your executives, board members, and advisors, too. Keeping everyone aligned on the budget and plan for the new year helps ensure buy-in and support.
Finalizing the budget is perhaps the most challenging part of the budgeting process. Not only do you need executive and stakeholder buy-in, but you also need to determine if you have all the financial information available to make an informed decision about how to approach Q1. For organizations that need Q4 financials to make decisions for the next year, this can create a lot of frustration.
There are some legitimate reasons why companies, especially ecommerce brands, might hold off on setting their budget. Ecommerce companies, for example, consider holiday shopping their Super Bowl, so a heavily weighted Q4 makes budget planning difficult. Without the final quarter numbers, there’s little to no visibility into whether operations executed as intended, making it challenging to plan ahead. And if a company has a big miss in the final quarter, it could force the organization to pump the brakes on the budget creation process.
Though this may seem like a good enough reason to wait to finalize your budget, trust us: You will be in better shape if you forge ahead.
The reality is that the difficulties that come with failing to set a budget prior to the start of the new year are too great to ignore. For example, without a budget in place:
While it might be hard for some companies to predict the entire forthcoming year, it’s still better to share a well-planned annual budget and revise it, if necessary, rather than have no budget or just an H1 budget.
Failing to plan is planning to fail. Bootstrapped companies are generally reactionary by nature because their limited capital forces them to just do whatever it takes to make payroll each month. But, to reach sustainable growth, founders should work to shift from reacting to planning, and institutional investors can help.
Institutional capital gives organizations more financial wiggle room so they can focus more on planning instead of surviving. At Elsewhere Partners, we not only provide our portfolio companies with capital, we also utilize our Operating Advisors (OAs) to join our companies in roles ranging from advisor to board member to full-time executive.
The reality is that some bootstrapped founders struggle with shifting to a planning mindset and are hesitant to spend money since, for them, cash has usually been tight. Our OAs offer guidance to CEOs and founders regarding where capital should be directed in order to accelerate growth.
In fact, we make it a point to get our OAs involved in the budget creation. They have the knowledge and experience to offer advice on which goals are realistic and which avenues are (and aren’t) helpful for the growth of the company.
OAs are also adept at identifying and defining the roles companies need in place at different stages of growth. For example, they can offer insights on where a company would be wasting money in hiring, and the positions they need to create and fill to reach the next milestone in the strategic growth of the business.
Budgets provide structure, help to establish goals, and ensure the board is informed and aligned with a founder’s vision. Clearly, solidifying your budget before the end of the year is essential to setting yourself up for success in the new year. One of the best ways to ensure this can happen is to start planning the following year’s budget in the middle of the year. By always looking ahead, you’ll be in a stronger position to more effectively guide your company onward and upward to the next level.
Our knowledgeable OAs help founder-led software companies with over $3 million in annual revenue reach the next stage of growth. Contact us if we can help your company accelerate into the future.