Here we are, halfway through the year already! Are you hitting your goals? Most likely, you’re hitting some and missing some. All CEOs understand the importance of a realistic budget. It’s a tool for guiding your business and providing the information necessary to operate within your means, as well as handle unexpected challenges.

Unfortunately, no one can predict the future. One thing we know for sure, the budget will be wrong! In a fast-growing company or an emerging industry, budgets by themselves often aren’t enough.

Below is the process we recommend our clients follow. The goal is to create a tool we can use for several years to come, improving over time as we learn more about the market, our customers, and our costs.

First, let’s think about projections. Projections, or pro-formas, are typically long-term, 3-5-year, big picture documents. What can my business do in five years? How much market share could we obtain? Creating projections are an aspirational exercise and they are often used for raising capital. They are not BUDGETS! Creating projections can be a fun exercise. Even though we know these numbers may be wildly off, it’s the process and the learning that happens during the creation that’s key. At a bare minimum, we’re forced to do market research, customer analytics, and think through our hiring needs.

Next, let’s look at budgets. This is basically a refinement of the projections process. Our clients typically present an annual budget to their boards at their December board meetings. The biggest focus in most budgets is hiring and people costs. The budget typically mirrors the chart of accounts in the accounting system, with each account having its own budget. Once the budget is approved or finalized, it’s imperative to measure yourself against it monthly. Ideally, management teams should take ownership of various line items of the budget and report to each other how they are doing against their budget, and why line items are being met or missed.

Last, but not least, forecasting. One of the best tools in the financial management toolbox is maintaining a real-time (or close to real-time) forecast. When companies are growing fast, or in emerging industries with a lot of unknowns, this tool is invaluable. It starts by creating a 12-month budget as usual.  As each month is closed, the document is updated with actuals. Then, upcoming months’ assumptions are updated with the new data learned in the last four weeks.

Finally, another month is added to the end of it. Voila! We now have the most accurate prediction of the future we could possibly have. An added bonus – we always have a 12-month budget ready to hand off to a board for approval, making that often-dreaded process completely disappear.