If you don’t plan, you plan to fail. Nowhere is this truer than in small business budgeting. You need to know exactly where you stand in terms of the expense budgets you must adhere to and the income budgets you need to reach in order for your business to be profitable. You also need to know that you’ll have enough cash flow, even in difficult months. Creating a budget for your company helps you to plan effectively, both for the good and the bad.
Ideally, you need more than just a plan for the financial year. Month to month budgeting helps you to ensure that your business is on track and enables you to take timely action when things aren’t going according to plan and you have to find investors.
Here are eight tips for building a better business budget:
1. Budget Using Historic Data
If your business budget has been operating for a year, or better yet, a few years, it’s easy to draw historical data and look for patterns. Most businesses (see how to set up a business) have busy and quiet times. During the run-up to the busy season, materials expenses can be high resulting in a potential cash flow crunch. Looking at historical data helps you to determine what you can expect from each month and allows you to plan ahead.
2. Budget Using Projections
New businesses can’t rely on historical data, so realistic income and expense projections are absolutely necessary for budget planning. If possible, try to get some idea of what you can expect by looking at similar businesses in your area that are for sale. Their figures will give you some indication of what you can expect. A solid rule of thumb is to consider reducing revenue expectations by 25 percent and increasing expenses by 10 percent.
3. Realism Over Optimism
Business budgets start becoming ineffective when optimism begins taking precedence over realism. When you’re starting from scratch with a business budget, you will have to allow for a greater margin of safety (when it comes to starting from scratch see also formation services and registered agents). That way, if one or two months don’t go as planned, you still stand a chance of breaking even or even making a small profit. Take the time to review profit goals and determine why certain figures are set the way they are. Business owners who allow too much optimism into their planning increase the chances of projecting revenue too high, expenses too low and serious disruption to their business budget and success.
4. Reduce Fixed Costs
Your fixed costs are usually fairly constant throughout the year, as the name suggests. Elements such as commercial property rental, wages and insurance need to be considered first. If you haven’t done this before, consider getting an accountant to act as a consultant on your business budget. Consider outsourcing certain tasks so that you can get away with a smaller staff and investigate the possibility of using contract workers during busy seasons rather than carrying a large staff all year round. The lower your fixed costs, the greater your chances of making a profit.
5. Link Expenses to Revenue
By tying certain areas of your spending to revenue, you’re setting yourself up for better control over expenses. First off, it structures your business budget so that you can’t spend more than what you’re bringing in. And second, it can bring a level of convenience and efficiency to internal planning. For instance, by tying spending to revenue, you can establish a marketing or sales budget as a percentage of revenue. You, therefore, spend less when you’ve brought in less money.
6. Time Variable Costs and One-Off Purchases
If you’re an established business, variable costs can be timed to match periods when your cash flow is likely to be stronger. New businesses usually need quite a large amount of variable cost to spend and one-off purchases just to get started. When creating a budget, think about the times you’ll need to purchase stock, equipment or vehicles and factor it into your budget or plan. Investigate suppliers and see what kind of deal you may be able to get when you will have to make payments.
7. Figure Out Overhead
Knowing the real cost of your product or service is crucial for good business budgeting. To grasp the real costs, you'll need to allocate overhead to each product or service created. Overhead includes items and costs that do not contribute directly to the creation of your product and service. Prime examples of this include marketing, insurance, utilities and phone and internet service. Knowing your exact overhead will help you price your product or service correctly.
8. Use Invoicing Software
New businesses need to be particularly careful in monitoring results to see if everything is on track. Many small businesses fall behind with their administration, particularly the capturing of business expense invoices. If you’d like to cut accounting fees, there are several online platforms that can help you to stay up to date with expenses by capturing and storing your invoices for you. Ideally, you should do a full analysis of where you stand in terms of income and expenses every month and for the year to date. Invoicing software (see also free accounting software) tracks everything and presents reports in an easy-to-read way, which can make analyzing and determining the reasons for variations simpler.
9. Ask Employees What They Really WantBefore you spend loads of money on ping pong tables, video games and pizza, survey your employees to ask them what perks they really want. Chances are you could be overspending in areas your team doesn't actually need instead of allocating that money towards something they do want instead — that may actually be more affordable or have a greater payoff.
The Bottom Line
Crunching all the numbers might seem like a daunting task. However, creating a small business budget is the best way of evaluating your chances of success with a new company and gauging your situation in the coming financial year for an established business. Planning ahead for lean times by ensuring that you have a source of additional finance can help you to stay afloat while those around you crumble. It’s all about being prepared, knowing what to expect and sticking to the plan.