Annual budgets completely suck. In this episode, Erik shares why you should stop doing annual budgeting and start thinking about monthly projections.
Erik J. Olson (00:01):
Annual budgets completely suck. Stop doing ’em and start thinking about monthly projections. What is happening? This is Erik J. Olson. Yeah. Back in like December of 2021, I created a, an annual budget and I tried to project out the revenue and the expenses for the entire year. I had a whole game plan, and guess what? It promptly fell apart. And when that happened, I was like, Oh, should I adjust my plan based on reality or should I just keep trying to hit the annual plan? Well, I mean, a lot has changed in this year. Like we’ve gone through a lot in the last nine, 10 months. And like to, to think that like the budget shouldn’t change is absurd. And so right now I’ve got like this financial projection that is completely out of whack with reality and, and I’m, I’m getting ready to just be like, you know, I forget budgeting altogether.
And today I actually worked on a financial projection. So really the only thing that I really, really, really need to like nail is next month’s expenses, frankly. And then, and then a guesstimate as to next month’s revenue. Now I say guessin because that’s a little less in my control as far as new clients or exiting clients, right? I can be surprised, but expenses, like I gotta pay the bills. So like I can control those if I have to. Like, I could clamp down if I need to be like, All right, cut that. We’re not doing that. Oh, Erik, we need to do it. Nope, nope, get rid of it. If I really had to, I have total control over that, but I don’t actually have control whether someone had signs a new contract or not. So I’m kind of guessing there, right? It’s a pretty good guess, but it’s still a guesstimate no matter what.
So I read this book called Simple Numbers by Crab Tree. I think it’s, hold on a second. Let me look for Greg. Greg Crabtree. It’s on my bookshelf behind me. So simple numbers. And that’s where he talks about stop budgeting. It’s just silly. And just start projecting. So take your existing month or the previous month and use those two things to create a projection. And so I did exactly that today and it was quite eye opening. So even though I look at my PNL every single month, I don’t know, like for whatever reason, after a couple weeks, I kind of forget what the numbers are. Some of the discrepancies from one month to a number just kind of like fade away into the, into my memory banks somewhere that can’t be retrieved, right? So like today, I was looking at our July p and l was looking at our August p and l. I’m at the end of September right now as I’m recording this. And I, I found a whole bunch of like discrepancies month to month for like certain line items. And I’m like, What’s that about? What’s that about? What’s this about? And so I started asking a whole bunch of questions. But I used all of that to create a projection for October. So this
Erik J. Olson (02:58):
Is, I, I’m going to be doing, I wanna see how it works, but my plan is just to project out one month. Now when it comes to revenue, I don’t mind projecting that out, kind of like, you know, fantasy land. What, what should it be in a year? Cause I do actually have goals. I have revenue goals. So I need at least some sort of a basic plan, and then I need to adjust it as time goes on. So anyways, project, don’t budget.