How to Create a Great Business Budget That Will Not Let You Down All Year Long
8 minute read
Planning and following a budget is definitely not an easy process. There are always unexpected events, cash flow issues, supply chain issues, and other nuances that can make a decent plan practically useless.
However, just because some difficulties may occur, that doesn’t mean that one should come to terms with eventual failures to maintain a plan. Quite the opposite, an ambitious business owner has to come up with impeccable budget plans if they want great results.
To avoid the risk of overspending or not spending enough money to grow your business, take a look below. This guide will help you plan out your business budget and follow through.
Why is your budget plan so important?
Budgets are extremely important to the operation of a business. They not only help manage costs better, but they also help determine whether the owner’s profit goals are realistic.
Your budget plan is there to keep you on the right path and save you from overspending or not spending as much as you should.
A budget plan, in simple terms, is a detailed plan of future receipts and expenditures. It serves as a tool that provides control and stability. Most small businesses use a budgeting method that starts by identifying the profit they are looking to make and then listing out the expenses that are necessary for reaching their goals.
Creating a budget plan — step by step
Creating a budget plan is a complex task that requires your complete attention. Any error made in financial projections can lead to costly effects.
To make this process easier for yourself, take a look at the tips that should make every step of budgeting significantly easier.
Take a look at industry standards
It’s fair to say that not all businesses are the same, but you should definitely keep an eye on typical figures in your industry.
Do thorough research regarding the trends in your industry, speak with your colleagues, and even reach out to your rivals. Try to figure out what portion of the revenue coming in will be allocated toward cost groupings.
Small businesses are often very volatile since they are more susceptible to industry downturns than larger rivals. Therefore, it may be best to look for average figures and not focus on specifics.
Update the budget plan every month
The only way that your budget is going to work for you all year long is if you revisit it every month with your management team and update it according to your business performance and expenses for the prior month.
Take a good look at your sales forecast, see how your pipeline is looking. Try to find indicators that may require you to adjust your budget to cover additional inventory or staffing needs.
Also, look at your expenses. See if they are as projected or you need to cut back in various areas to make sure that you stay on track.
Create a spreadsheet
The foundation of a good budget plan is a good spreadsheet. This spreadsheet estimates what total money amount and percentage of your revenue will need to be allocated toward raw materials and other costs.
It is not a bad idea to contact suppliers you work with before you carry on. Repeat this same process for rent, taxes, insurances, and so on.
Finally, understand the different types of budget you will need to set up for your small business and how to implement them.
Don’t be afraid of making changes
Consider your monthly reviews and don’t be afraid of making the necessary cuts. Make changes to your budget and then wait to see how it impacts your profits.
Track the progress regularly. For instance, if you are under-investing in marketing, adjust your budget and see what happens to your pipeline in the following months or over six months.
Then, in your next review cycle, try to figure out if you are getting a good return on marketing money spent per sales lead. Use this information to inform future planning decisions regarding where you should allocate your costs.
React fast to the changes you did not anticipate
Using the budget to adjust to the unexpected is something you should be ready for.
- What will you do if an important client cuts their budget and reduces the amount of business they do with your business?
- How long will it take to find a new client to replace that important revenue source?
- What will it cost you in terms of marketing or hiring costs to help you find new business?
These are all important points to consider.
Always factor in some slack
Even though you may estimate that the business will generate a certain amount of revenue and thus gain a rate of growth going forward or that certain expenses will be fixed or can be managed, these are estimates and they are not facts set in stone.
Since the estimates are only estimates, it would be helpful if you factored in some slack and ensured that you have more money than you need before expanding the business or recruiting new employees.
Look around for new supplier
Never hesitate to shop around for new suppliers or save money on other services being performed by your business.
This should be done at certain stages, including when purchasing or starting a business or when setting annual or monthly budgets, as well as during periodic business reviews.
Finally, tie incentives to budget performance
A good way to have every team member on-board with the idea of focusing and interacting regularly with your budget is to tie performance bonuses to it.
At the start of the year when you plan your annual budget, set parameters for performance tied to profit.
However, also set parameters for other categories such as return on investment in marketing money, keeping expenses at the same or lower level than planned, and so on.
Budgeting properly is only possible when you do it carefully and with accuracy. You, as a business owner, need to create a budget in order to forecast current and future revenue to expenses.
The overall goal is to ensure that enough money is available to keep the business up and running, grow the business, compete, and ensure that you have a good emergency fund in case something unexpected happens.
Give this guide another read and if you need help from experts, take a look at Sleek’s accounting services.