Sometimes planning and maintaining a budget can be quite hard. There will always be cash flow problems, unforeseen events, and other issues that may come your way. Even if you have the most carefully planned business budget, there will always be some issues that will arise from time to time. Also, most of us will create a budget for business and personal use at the start of the year but will forget about them until the year ends.
Keep in mind that your business is not inactive, so your budget should not be either. So, what can you do to develop and manage a dynamic budget that can keep you on the right track throughout the year?
Why Is It Important To Have A Budget?
Budgets are extremely important for the successful operation of your business. They can help you in managing your costs, at the same time, they can help you in determining if you are accomplishing your profit goals. You will always be on the right course every month. Simply put, a budget includes all the details of your future purchases and expenses. A budget is simply a tool that can provide you with some control over things. For instance, by looking at your budget, you will know when is your peak season. Hence, you can allocate some money to buy more stocks so you can handle the sales volume. During the slow period, you could schedule an inventory or plan a vacation or a marketing activity.
Generally, small business owners plan a budget by determining the profit that they want to make. Afterward, they will list all the expenses that are needed so they can achieve their goal. There are a lot of resources that you can find on the internet that can help you in creating a budget for your business.
Planning For The Success Of Your Business
As a business owner, you can easily get distracted by your day-to-day problems and sometimes you forget about the bigger picture. However, business owners who have successful businesses spend time building and managing budgets. They examine their business plans regularly and keep track of their finance and performance.
In order to grow your business, you must have structured planning. This can help you in reducing your expenses, improving your returns on investment and increasing your profits. Even if there is no formal process, most business owners perform their activities based on their business plans. For instance, in improving their cash flow and profit, in beating their competitors as well as in growing their business.
Transforming these things into a process that can help you in managing the development of your business does not have to be difficult. The most important thing is your budget or business plan should be dynamic and everyone in the organization should get involved.
What Are The Benefits of a Business Budget?
Business owners can enjoy a lot of benefits from creating a business budget. First of all, it can help them in managing their money effectively. Additionally, they can assign suitable resources to every project. If you want to improve your decision-making and fulfill your objectives, then you should draw up a business budget. By constantly monitoring your performance, you can easily recognize problems even before they happen such as facing cash flow challenges or the need to increase finance. A business budget can even be used as a motivation for the staff. Additionally, it can also help you plan for the future.
How To Create A Business Budget?
The key to a successful business is to create a budget that you can properly monitor and manage effectively. It can help you determine where to allocate your resources. In this way, your business will still be profitable. Your budget should not be too complicated. All you need to include are your potential earnings and expenses during a particular period.
You can start by asking relevant questions. For instance, what are your predicted sales for a certain period? You need to be realistic with your answer and avoid overestimating since it might cause some problems in the future. How much is your estimated cost of sales? This will include the cost of materials as well as the payments for subcontractors. How much is the cost of your overhead or fixed costs? These overhead costs should be broken down based on their categories.
There are different types of expenses in your business. Perhaps you might need to divide your budget so you can allocate funds for each department. Be sure to add your personal expenses and don’t forget to incorporate an allowance for tax. After having these figures, you will know how much is your projected income and expenses.
By having a business budget, you will know how much money you will be earning. You can look for ways to reduce costs. It will be easier for you to figure out if you will be having some cash flow problems so you can do something about it.
After having a budget, as much as possible try to stick with it. But every now and then, you could review and revise it if you want to. Most often, successful businesses have their own rolling budget which they will continue to use.
Essential Steps In Building A Budget
There are essential steps that you need to follow in order to make sure that your budget is realistic and valuable.
- By investing time in building a thorough and realistic budget, you will be able to manage it easily and effectively.
- You can use the information from the previous year so you will have some ideas about the sales and costs of your company. However, it is also important that you have to consider your sales plans, where are you going to invest your resources and what are the changes that you have to apply based on your competitive environment.
- Be sure that your budget is realistic. When creating a budget for your overheads, you can base it on your previous data, business plan, and developments in your operations.
- It would be more valuable if you can associate variable costs and sales.
- It is essential that your budget includes the necessary information so you can easily monitor your capital, sales, and costs. You can use accounting software to help you in handling your accounts.
- If you have financial experts in your company, then you can ask them to give some estimations for your budget. For instance, figures for the production costs, sales targets, as well as for any specific projects. By comparing your estimates against theirs, you will be able to obtain a realistic budget. If you involve the right people on your budget, then the more they will be committed to meeting the budget.
What Will Be Covered By Your Budget?
You have to figure out how many budgets you need. Most small businesses only need one for their entire operating budget. This can give you some ideas on the amount of money that you need in running your business for a certain period, most probably for a year.
As your business starts to grow, you will be needing a lot of individual budgets, for instance, for sales, marketing, etc.
What Should You Include In Your Budget?
Predicted Cash Flow
Projecting your cash will provide you some ideas about your cash situation in the future. This type of budgeting is critical for small businesses since it can quickly recognize the difficulties that you might be experiencing. Be sure to check on this on a monthly basis.
Generally, there are three types of costs. These are fixed costs, variable costs, and capital costs. Fixed costs include salaries, rental fees, etc. Variable costs are raw materials, overtime expenses, etc. Capital costs pertain to the acquisitions of equipment, properties, etc. In order to make an accurate projection for your expenses, you can take a look at your last year’s records. You can also gather quotes from your suppliers.
Sales or Revenues
When it comes to projecting your sales or revenues, it will be dependent on your sales history as well as how effective your performance will be in the future.
Based on your sales and expenses forecasts, you can project your profit for the following year. This is very valuable since it can help you in analysing your margins, return on investment, and other important figures.
What Is The Purpose Of Creating A Budget?
A budget can be used for measuring the performance of your company. If your budget is dependent on your business plan, then you will have a financial performance plan. By reviewing your budget more frequently, it can serve a lot of purposes. For instance, a budget can be used as a source of information to support management’s decisions for the next 12 months.
By making a comparison of your budget year after year, it will give you a chance to benchmark the performance of your company. For instance, you can compare your predicted figures against the previous years in order to gauge your performance.
A budget will serve as a representation of the sales and costs that are involved in every activity. It can also be used as a mechanism for effectively controlling and monitoring your business. This is very important most especially when it comes to analysing the variation between your real and budgeted income.
Don’t Forget To Update Your Budget Every Month
If your budget is working well on you, then you need to revisit it every month. You could update it and make some changes based on the performance of your business and the expenses that you have incurred for the previous month. Examine your sales forecast closely. Are there any signs that you need to make some changes to your budget? Should you add more stocks or additional staff to your company? Check your expenses. Are they as you predicted them to be? Or perhaps you need to reduce the cost in some areas so you can guarantee that you are on the right track.
Create Some Changes That Can Provide A Positive Impact
After making a review of your budget every month, you can try implementing some changes and observe its impact on your income and profits. For instance, if you think that you have a lesser budget in marketing then you can make some changes to your budget and observe what will happen over a month or after six months. On your succeeding review, check if you are getting a good return on the money that you spent on marketing based on the sales lead. Then you can use this data for your planning decisions in the future. It can help you decide where should you allocate your funds.
How about your receivables? Think of some ways that can improve your payment and invoice processing so you can maintain the cash flow in your business.
Be Ready For Some Unexpected Changes
You can also use your budget in responding to unexpected circumstances. For instance, one of your important customers reduces their own budget and as a result, they also decrease the amount of business that they do with you. Examine your budget and see how this decline in revenue can affect your cash flow. Can your business endure these abrupt changes? How long will it take before you can find a new client that can replace the one that you’ve lost? It is very important that you have to replace the revenue that you’ve lost as soon as possible. Determine the cost needed in marketing to help you obtain a new client.
Budget Performance Should Be Rewarded With Incentives
If you want everyone to focus on your budget, then one of the best things that you can do is to give them performance bonuses. Hence, at the start of the year, when you are planning your yearly budget, you need to set some targets for performance that can result to profit. Aside from this, you can also set other categories, for instance, maintaining lower expenses, the return on investment in marketing, and others.