Business or budget - which word gets you excited? Not many business owners get giddy thinking about budgeting, yet it's a necessary aspect of any business.
Your budget should encompass all aspects of your business's financial operations. This includes fixed and variable costs, payroll, marketing, and expenses. It also means setting enough money aside for a contingency fund.
Managing your budget is a day-to-day act. Set daily goals, estimate daily income and expenses, and make adjustments. You'll always need to be mindful of cash flow and debt management if you have any debt.
Budget management may seem daunting, but know that every business is different, and it'll be essential to make many considerations to create a business budget that works for your business. Let's look at some considerations when creating a budget that works.
Identifying revenue sources and income streams
To comprehend your business's financial health:
- Begin by analysing your revenue sources
- Delve into each revenue source and measure their consistency
- Look for trends and identify the products or services driving most of your income
For a holistic view, it's best to examine your primary products or services as well as any auxiliary revenue channels. For example, licensing fees, subscriptions, or partnerships. By mapping out these sources, you gain a complete view of your business's financial inflows.
This step is vital as it enables you to pinpoint the core drivers of your revenue. When you understand that, you can allocate resources more strategically.
For instance, if you're a software company, you might identify that a particular software suite generates the bulk of your income. Knowing that can guide you in focusing marketing efforts and product development for that segment.
Equally crucial, conduct a comprehensive evaluation of your cash flow. A robust working capital position is essential to meet daily operational requirements.
Analysing fixed and variable costs
A thorough analysis of your fixed and variable costs is equally significant in building your budgeting foundation. Fixed costs are those that remain relatively stable regardless of your business's level of activity, such as:
- Insurance premiums
- Software subscriptions
Variable costs, on the other hand, fluctuate based on production volume or sales, like:
- Marketing & advertising
- Distribution expenses
By understanding these cost categories, you gain insights into your cost structure. These insights empower you to make informed decisions about cost-reduction strategies, operational efficiencies, and resource allocation.
Set clear and realistic financial goals
Your financial objectives should align with your business's overall vision and growth strategy. Your goals serve as a roadmap for your financial decision-making. This comprehensive approach to financial goal setting involves both short-term and long-term perspectives.
Short-term financial goals, covering a year or less, encompass objectives such as expense reduction, bolstering cash reserves, or enhancing liquidity. For instance, you could set a target to decrease operational costs by 10% in the upcoming quarter.
In contrast, long-term financial goals contribute to your business's overarching mission. These goals might involve market expansion, research and development investments, or achieving a specific revenue milestone over five years.
One accessible and easy-to-implement tool for small businesses is to adhere to SMART goals:
The SMART framework precisely defines goals. Using a framework ensures goals are measurable, attainable, aligned with your business's trajectory, and bounded by a reasonable timeframe.
Striking a balance between short-term financial stability and long-term growth is paramount, as short-term goals address immediate challenges. In contrast, long-term aspirations drive enduring success and innovation.
Involve key stakeholders in budget planning
Collaborative budgeting ensures that diverse perspectives and insights contribute to the budgeting strategy. It can help foster a sense of ownership and accountability throughout the company.
Engaging department heads, managers, and team members in the budgeting process allows for a more comprehensive understanding of resource needs.
For example, sales teams can provide revenue projections, operations teams can offer insights into production costs, and marketing teams can contribute to promotional expenses.
This inclusive approach results in a more realistic budget and enhances cross-functional communication and alignment.
Tracking and monitoring expenditures
Budgeting is a never-ending process, and you must have robust tracking and measurement tools in place. For smaller companies, specialised budgetary software will eat into your budget. So, at first, using a free tool such as Google Sheets will meet your needs. Be sure to limit access for privacy purposes and create backups.
For digital records of expenditures, always ensure invoices are created and, when digitised, are photographed and kept on record. Label everything to quickly identify future budgetary needs and over expenditures.
Regularly review and adjust budgets
Remember, flexibility is vital. Your budget should adapt to changing circumstances and be a tool for guiding your financial decisions and achieving your business objectives. Many businesses make the mistake of believing a budget is a set objective. Having an inflexible mindset will only put your business down the wrong path.
It's a good idea to regularly review your tracked costs, revenue, and income across allocations and departments. Take your analysis and adjust as needed throughout the year to improve your budget.
At the same time, analyse your budgetary tracking process. Take note of what's working well and what needs to change to make monitoring easier.
Celebrate budget successes and milestones
Budgeting doesn't need to be boring.
When milestones are reached, celebrate them! Get the whole company involved - it will boost morale and build a strong company culture. But how do you do this without taking (too much) from the company budget?
- Host an out-of-office co-working day
- Have a casual or dress-up theme day
- Give entertaining recognition certificates out
Allocate budget surplus to a contingency fund
If there's a surplus of money, you may want to assign that money elsewhere.
However, you should strongly consider building a contingency fund in a savings account. This will create an emergency fund to act as a reserve of cash to handle unforeseen circumstances.
Saving money helps create financial security for your business and will provide liquidity for your business when it's time to grow. Otherwise, you may need to invest personal savings or take out business finance to bolster your cash flow.
One final tip
Be realistic and accurate where possible. Avoid estimating costs, and don't make profit assumptions. You'll nearly always miss the mark. So keep it real, and remember to update your budget projections often to keep your financial plans on track.
About the author
Simon Bacher is on a mission to help everyone learn something new everyday. As CEO and Co-founder of the Ling app, he's using the power of language to bring communities together and break boundaries while supporting other growing businesses to reach success.