Business Budget: Why Next Year's Should Start in September

The short answer: start your business budget in September, not December. A budget written the week before Christmas can only record decisions already made. Starting four months before year end gives you time to change next year: September to reforecast, October to build from the bottom up, November to stress-test, December to sign off and phase by month.

The short version

Month	The job	What you come out with
September	Work out where you’ll actually land this year	Full-year revenue and profit, year-end cash, and the run rate you’ll carry into January
October	Build next year from the bottom up	A budget built from decisions and drivers, plus a separate cash plan
November	Test it against a bad year and a good one	Where cash gets tight, what you’d cut, and whether growth needs funding
December	Sign it off and split it into months	Monthly figures and a diary date to compare actuals every month

If your year doesn’t end in December, start four months before your year end.

There’s a budget that gets written in a lot of growing businesses every December. It’s usually done in the week before Christmas, by one person, in a spreadsheet that starts from this year’s actuals and adds a growth percentage to the top line. Costs go up by a bit less than revenue, the profit line looks encouraging, and everyone signs it off because they’d like to go home. By February it’s already wrong, and by March nobody opens it.

I see a lot of these, and what goes wrong with them is almost always the timing. A budget written in December can only describe decisions you’ve already made. By then it’s too late to announce a January price rise, the hires for the new year have either happened or they haven’t, and your biggest contracts have renewed on whatever terms they renewed on. Start in September and there’s still time to change the year you’re about to have, rather than just writing it down.

So, the calendar I’d use. It runs over the four months left in the year, with one job for each, and it works the same way at £2M as at £15M. The bigger business just has more lines in it.

September: work out where you’ll actually land this year

Before you plan next year, you need an honest view of this one. That means a reforecast rather than last December’s budget, which is probably fiction by now: your actual figures to the end of August, plus a realistic view of the four months still to come.

You’re after three numbers: revenue and profit for the full year, the cash you’ll have in the bank on 31 December, and the run rate you’ll carry into January. That last one means what a normal month costs you and what a normal month brings in, as things will stand at the end of December.

People usually skip the third one, but it’s the one next year actually starts from. If you took on three people in October, your January cost base is a good deal higher than this year’s average suggests, and a budget built from the annual totals will be wrong from its very first month.

October: build next year’s business budget from the bottom up

The percentage-on-the-top-line budget is tempting because it’s quick. The trouble is that it doesn’t contain a single decision. Revenue doesn’t grow by 20% because someone typed 20% into a cell.

Build it instead from the things that actually drive it. For a services business that’s roughly the people you’ll have, how much of their time is billable, and what you charge for it. For a product business it’s units, price and margin, product line by product line. Either way, write the budget around the decisions you’re planning to make: the price rise, the two hires and when they start (and what they’ll really cost), the new market, the contract you suspect you’ll lose. If a number can’t be traced back to a decision or an assumption someone could argue with, it shouldn’t be in there.

Then do the cash separately, because in a growing business profit and cash rarely move together (I wrote about why back in June). Put in when customers actually pay you, when the VAT and corporation tax bills land, and when annual contracts renew. A budget that shows a profit every single month can still leave you short in the months when the big payments go out.

November: test it against a bad year and a good one

Now try to break it. Ideally hand it to the most sceptical person you know and ask them to find the number they don’t believe.

Then run it three ways. First, the plan as written. Second, a bad year, where your biggest customer leaves or sales come in a fifth below plan. At what point does cash get tight, and what would you cut first? Third, a good year, where everything goes better than you hoped.

The good year is the one that catches people out, because growth costs cash before it makes any. More sales means more stock, more people and more money owed to you by customers, all of it paid for before the revenue arrives. We worked with a games and puzzles manufacturer whose growth needed exactly this kind of thinking. We designed a funding structure combining trade finance, invoice financing and credit insurance, and that structure is what let them take on their first £1M client. If your good year needs money you don’t have yet, far better to find out in November than in the week the big order lands.

December: sign it off and split it into months

By December there shouldn’t be much writing left to do. Agree it with whoever needs to agree it, then split it into months, so each month has its own figure for revenue, costs and cash. An annual total you can only check at the end of the year won’t tell you anything until it’s too late to act on it.

Then decide how you’ll use it. Who compares the actual figures against the budget each month, and what happens when they’re off by more than a few per cent? Put that review in the diary now, for whenever your management accounts arrive each month. If nobody looks at the budget monthly, it’s in a drawer by March and you’re back to running the business off the bank balance.

Could you write down your year-end numbers right now?

Your ten minutes for this weekend: without opening anything, write down your revenue for this year, your profit for this year, and the cash you’ll have in the bank on 31 December.

On Monday, check them against your management accounts and your bank. If you couldn’t write them down, or they turn out to be a long way off, you’ve found your first job. And while the diary’s open, put in four dates between now and your year end, one for each month’s job.

If you’d rather not build next year’s budget on your own, this is exactly the work our CFOs take on at this time of year. WrightCFO is a practice of fractional CFOs: experienced finance people who work alongside you for a few days a month. Building next year’s budget is one of the most useful pieces of work we do: we start with the reforecast and have it signed off before the year ends. If you’d like to talk it through, book a 30-minute call with me.

— Sophie

Frequently asked questions

When should a business start its annual budget?

About four months before the financial year end. For a December year end, that means starting in September, so there is still time to make the decisions the budget depends on, such as price rises, hires and contract renewals.

What is a bottom-up budget?

A budget built from the underlying drivers of the business, such as headcount, billable time and rates for a services firm, or units, price and margin for a product business, rather than by adding a percentage to last year’s figures.

Why do I need a separate cash budget?

Because profit and cash move at different times. A cash budget shows when customers actually pay, when VAT and corporation tax fall due, and when annual costs land, which can leave a profitable business short in particular months.

How should I stress-test a budget?

Run at least three versions: the plan, a bad year (for example losing the biggest customer or sales 20% below plan) and a good year. Check when cash gets tight in each, what you would cut, and whether faster growth needs funding.

How often should I compare actuals to budget?

Every month, as soon as the management accounts arrive, with an agreed threshold for when a variance needs explaining and action.

This article was first published in The Scaling CFO, Sophie Wright’s fortnightly newsletter for founders between £1M and £20M. Subscribe free. Related reading: The price rise you’re too scared to make.

Sophie Wright is the founder of WrightCFO, a UK fractional CFO practice. WrightCFO provides fractional (part-time) Chief Financial Officers to founder-led and private equity-backed businesses, typically between £1M and £20M in revenue, scaling towards and beyond £10M. The practice specialises in cashflow forecasting, margin and pricing, investor-ready reporting, post-acquisition integration and exit readiness, across the technology, creative, media, professional services and not-for-profit sectors. WrightCFO works alongside clients’ existing accountants rather than replacing them.