Running your business takes work—an understatement, right? You're generally focused on the day to day operations, on how smoothly things are progressing, and sometimes as a result, you lose sight of some of the financial details. This is where budget planning becomes essential. Not only is it about budget planning for your small business, but also monitoring and sticking to that budget. A good budget represents a great roadmap for you to follow. Think big picture, think about the longevity of your company—without a well planned and executed budget, the future is a bit cloudier. In this article, we review the importance of budget planning along with some advice and tips as to how to better navigate your company's financial future.
Why Budgets Are Important
Obviously, any good business is out to make a profit. By adhering to a budget, you can keep better track of where you stand, what money you have coming in, and what is going out. Not to mention, a budget can help you to forecast what lay on the horizon, financially speaking.
Consider the following advantages of creating and sticking to a detailed budget:
- Plan for your expenses—don't be surprised by them
- Make realistic economic decisions
- Identify trends in sales and revenue
- Track cash flow
- Scale your business
- Spot roadblocks before they become significant financial problems
Often in business, we do need to pivot or change direction. Things may be going along swimmingly and then a problem arises which forces you to shift. With a budget in place, you can better predict these types of things ahead of time so you're not caught off guard.
How to Go About Planning a Budget
To start off, you need to have all available info on hand. So for instance, you want your company's complete financial history. Background data is key—to know where you're going, you need to know where you've been.
Gather such documents and statements as cash flow, balance sheets, general financials, even your business plan if you have one (which you should definitely have one/). Once you do have all the relevant information, you want to start drafting the budget for next year.
Revenue - Begin by evaluating revenue. If you're a newer company, you may have to examine the industry at large and make some predictions. For established businesses, look back at your monthly, quarterly and yearly income. Are there any discernible trends? Can you expect the same for next year, or does it show signs that there may be a dip in sales coming for instance?
Expenses - You want to consider all the expenses that your company has. These will vary from industry to industry, but typically they will include:
Fixed - Those costs that do not differ from one month to the next, so things such as rent, any leases, and insurances.
Variable - These costs will change depending on the circumstances and the needs of the company. Things such as raw materials, inventory, and shipping expenses are variable costs.
One-time costs - These are those costs that can creep up on you and significantly hamper your business if not planned for. You should be setting aside money as a sort of emergency fund for just these types of exigencies. If you need a new piece of equipment or need to put a roof on your office building, for instance, that last thing you want is to leave yourself short-handed.
Time to Interpret Data - Upon gathering everything all applicable financial info, you then have to set about drawing some conclusions and making predictions. In terms of your annual revenue, be conservative in your estimations. For instance, if the company made 200k last year, but the years prior only 150k, then it is wiser to go with the lesser number.
And of course when counting expenses factor in absolutely everything, even if you think it just a small expense. Small expenses add up too. If you ignore these then you are leaving critical data out of the budget. This is the company's future you're trying to get a handle on after all.
After you've figured the income and consequent expenses it is now time to try and calculate the profit. Essentially this amounts to Revenue minus Expenses. Knowing where the profit likely stands will allow you to create a more relevant budget. For example, if the profit is in the negative, then it is definitely time to sit down and determine exactly where costs can be cut. Or perhaps you want to look at ways to boost those sales figures. Just understand where you are and where you need to be in moving forward.
Business Budget Templates
In terms of actually putting this all down on paper, so to speak, there are currently tons of programs and software available to help you construct a professional, organized and effective budget. Some of the resources to which you might turn as far as accounting tools include: Microsoft Office, Google Sheets, and Capterra among others. Essentially, all you really need to know how to do with these is input the requisite data and the program will take care of the rest!
Monitoring Your Business Budget
Budgets should not just sit static after they're created. You have to update the budget monthly. See if your current performance aligns with your budgetary expectations/predictions. If there are discrepancies or things aren't going exactly as planned, then you will need to make adjustments.
And again, there will be those unforeseen expenses that can throw a wrench into things. This may necessitate moving money around, or even perhaps taking out a loan if the cost is too big—remember, you don't want to leave yourself with a negative cash flow position. The point is, stay on top of the budget, consult it when necessary and use it to advantage your small business.
If your business is in need of funding for unforeseen expenses or just in general to improve your business budget, First Union can help. We offer loan products from short term loans to lines of credit. Speak to one of our agents. Call today!