Starting or running a business is an exciting prospect. But, once the money starts rolling in, many small businesses put financial management on the back burner. It’s a dangerous place to be. If you ignore the budgetary process you may as well be driving with your eyes closed.
Why Budgets Matter
Your business budget is a critical tool for controlling your business. Not only does it help you manage your costs, it also helps you determine whether your business is financially equipped to reach its profit goals – after all, you need to spend money to make money.
In its simplest form, a business budget details your future receipts and expenditures. By helping you match your expenses (such as marketing, equipment investments, and staffing) to your anticipated receipts, you can better anticipate the availability of cash. It can also help you see where any cash shortages arise. In this way your budget is very closely aligned to your cash flow forecast, another critical financial document. After all, a key part of managing cash flow is having a firm grasp of your anticipated expenses and when they must be paid.
Your staff also depend on your budget to understand their goals, departmental budgets, and progress against those targets.
Budgets are Living, Breathing Documents
Too often budgets are drawn up and then promptly filed away in a drawer. Perhaps you created a budget when you started your business, or were required to do so to secure a loan.
That’s great, but business budgets are living breathing documents, much like your business plan. To be most effective you need to visit them often. Without frequent review of the variances between your budgeted numbers and your actuals, how can you know if your business is on course?
As a rule of thumb, try to refer to your budget daily. Record any differences between income received and expenses paid. Then, once a month run a budgetary report with actuals, budgeted numbers, and any differences for the month and year-to-date. Accounting software makes this a one-click task.
Compare that data to your sales performance, pipeline, and any other indicators that may suggest that you need to re-appropriate budget or cut back to ensure you remain cash flow positive.
Where to Get your Budget Data
If you’re an established business, take a look at historical data as well as your accounts receivable and inventory from your balance sheet. If you run a business with several departments, each with their own operating budgets, engage your team in the budgeting exercise (this will help drive accountability for how they manage their budgets).
If your new to business, do some research, such as analyzing who will buy your product or service. In what volume and at what price? What do you anticipate your marketing ROI to be? This is all vital information that will inform your income data. Don’t overestimate, be conservative. Then calculate your expenses (fixed and variable). Be prudent. Until you have a track record of expenditures to reference, over-estimate these numbers by as much as 25%. You can also use your business plan’s financial data to help forecast your figures for the year.
Both new and established businesses should also refer to their cash flow forecast. This will help inform how much money you need to set-aside in your budget to overcome any shortfalls.
Manage your Budget to your Business
Don’t fall into the trap of letting your budget manage your business. Instead, manage your business to your budget. If something isn’t working, such as a marketing campaign, ask yourself why and shift gear in another direction until you find what works within that allocated budget.
If you’re new to budgeting or just need help, consult an accountant to understand how to prepare and manage your budget. In addition, several organizations such as the U.S. Small Business Administration and SCORE offer free training and mentoring in all aspects of business management, including financials.