Overview
When building out next year’s budget, incorporate your current position in terms of closed-but-not-completed and proposed work engagements. If you do not already use and update a backlog and pipeline, this is a good time to create both. They will greatly assist in showing the outlook for the upcoming months and any gap to meeting budget.
Backlog (WIP)
A backlog (or work in process) is a list of work engagements with estimated future billings that have been won (approved and signed but not yet fully delivered). It is helpful to include a target timeline for each project in the backlog to show when each one is expected to be completed. A sample backlog is below:
Company Name | Work Type | Estimated Total Time | Monthly Value | Total Value | Total Remaining Value This Year |
Client A | Project | 6 months | $2,000 | $12,000 | $10,000 |
Client B | Monthly Recurring | Ongoing | $1,450 | $18,000 | $17,400 |
Client C | Project | 12 months | $1,100 | $12,000 | $3,300 |
Client D | Monthly Recurring | Ongoing | $1,200 | $14,400 | $14,400 |
Client E | Project | 4 months | $1,500 | $6,000 | $3,000 |
Client F | Monthly Recurring | Ongoing | $850 | $10,200 | $10,200 |
Client G | Monthly Recurring | Ongoing | $3,000 | $36,000 | $36,000 |
Client H | Project | 12 months | $950 | $11,400 | $5,700 |
Client I | Project | 6 months | $1,000 | $12,000 | $2,000 |
Total |
|
| $7,250 | $62,400 | $102,000 |
Total Backlog Value This Year: $102,000
This Year’s Budget: $155,500
Gap to Budget: $53,500
Using this sample backlog, we can see which months in the upcoming year should have certain amounts allocated from clients with ongoing work, and we can enter these in the draft budget.
Our gap to budget from this sample backlog is $53,500, and we can see that, especially in the second half of the year, we need to replenish the backlog to make up the deficit. With a sample budget of $155,500, it is a good goal to maintain an average of about $13,000 in revenue per month. How do we replenish the backlog? With the pipeline.
Pipeline
A pipeline is a list of proposed but not yet won work. Similar to the backlog, it includes the name of the company, the type of work proposed, and the total value of the project. Because a pipeline is a list of possibilities, it is very helpful to assign to each item a percentage showing the likelihood that it will close. A sample pipeline is below.
Proposal Pipeline | Estimated Total Time | Monthly Value | Total Value | Weighting | Weighted Value |
Prospective Client J | 4 months | $1,250 | $5,000 | 25% | $1,250 |
Prospective Client K | 4 months | $2,500 | $10,000 | 25% | $2,500 |
Prospective Client L | 6 months | $5,000 | $30,000 | 50% | $15,000 |
Prospective Client M | 8 months | $1,250 | $10,000 | 75% | $7,500 |
Prospective Client N | 10 months | $2,000 | $20,000 | 50% | $10,000 |
Prospective Client O | 4 months | $1,875 | $7,500 | 50% | $3,750 |
Current Client C | 4 months | $5,000 | $20,000 | 50% | $10,000 |
Current Client F | 10 months | $2,000 | $20,000 | 75% | $15,000 |
Current Client I | 9 months | $1,250 | $15,000 | 75% | $11,250 |
Total Pipeline |
|
| $197,500 |
| $86,350 |
Now, use the pipeline to fill in the gaps in the sample budget. Add the pipeline items with high probabilities to the budget in approximately the months they are expected to begin. Some of the gaps will likely be filled by work that is not yet identified in the pipeline because the opportunity will arise later next year. Add “New Project” and assign a conservative but reasonable amount billed as a placeholder in these cases.
Sample budget:
You now have a draft revenue budget that matches the targeted amount in revenue. Take some time to review it and envision your year consisting of the work you have included. Does it seem too aggressive, too conservative, or realistic? Are there other sources of income you have not yet added? Very often there are ebbs and flows budgeted during the year, and these can possibly be smoothed out. However, the peaks in the forecast can also become a target for a new growing revenue run rate and the company can staff accordingly.
After refining the income side of the budget, work on the expenses side. Budgeting for expenses is covered in previous November topics. Don't hesitate to reach out for any previous monthly topics from our archive. With the backlog and pipeline incorporated into the revenue forecast is it much clearer what growth risk you are taking.
Summary
Budgeting is always an exercise in optimism – trusting that the recurring work will continue as expected, that projects will be completed on time, and that new work will materialize. A budget is only as good as the actual work done to make all this happen, and there will always be surprises along the way during the course of the year. A budget is a best estimate given the knowledge you have at a single point in time. Using a backlog and pipeline to create the budget is a strategic way to make best use of the data points you have regarding your business’s income in the next year.
Don't hesitate to reach out to us for copies of prior editions from our extensive Monthly Topic archive. Other November Budget Monthly Topics include: Budgeting for Economic Downturn, and Standard Budgeting Process.