Managing a business without a budget is like navigating a maze without a map. You will make mistakes frequently, which means it could take longer than expected to reach your goals. In the worst-case scenario, you’ll end up burning through your resources (money) without making any real progress.
So, if you want your business to succeed and grow, you must not only design a practical budget but also execute it intelligently. Here are some of the best budgeting tips and lessons you can use to get the most out of your finances this year.
What’s a business budget and why is it important to have one?
A business budget is a statement of your business’ finances. The report tells you how much money you have, how much money each vertical or department receives, and how much money you want to earn. Budgets also consider expenses and costs and give you the financial information you need to determine the direction of your business.
Making an annual budget is something you likely know all about as a business owner. Yet sometimes, budgets don’t lead to the kind of financial freedom, operational efficiency and business growth you might be hoping to achieve. However, with a few smart and effective changes to your budget, you can get more bang for your buck and finally meet those high-sitting goals.
You should create a budget for your business even if you are a solo entrepreneur. By doing this, you’ll identify the unknowns and be prepared for contingencies that would otherwise throw your budget out of whack. If you are just starting out as a small business owner, you can use this blog as a guideline to allocate your money and set your financial goals.
But before that, here are some tips that will immediately help you unlock value in your business budget and make it more effective.
4 simple tips to build a better budget
According to a U.S. Bank study, a whopping 82% of businesses that failed did so due to cash flow difficulties. Improper budgeting is often to blame for this. To avoid this particular pitfall, here are four budget-boosting tips to help you get a better handle on your money.
Set clear expectations right from the start
Budgets enable businesses to track their spending throughout the fiscal year. However, budgets often fail because the expectations and ambitions of business owners are not based on analysis and numbers. They simply allocate resources based on wishful thinking. A successful budget must be based on realistic expectations and must take into account risks and challenges.
As important as it is to target growth, a good budget also helps in identifying money-draining trouble spots, plugging them and redirecting resources to more profitable and growth-supporting verticals.
Setting small and realistic budget goals and achieving them is much more effective than setting ambitious ones that might spiral out of control and make you feel like you are losing your grip on your business.
Build a supply-demand model for each business unit
With budgeting, the more granular you are, the better. This step can be thought of as a pre-budgeting step that allows you to examine in depth the various facets of each business vertical before allocating resources to it. Generally, businesses allocate more budget to verticals where demand is expected to grow. While this approach addresses the supply side of the equation, it doesn’t address the demand side. You must be ready to answer questions like why the demand is expected to increase, and if it is expected to increase, how will your business capture some of that demand. As you balance both the supply and demand sides of the equation, your forecasts will become more accurate.
Analyze the contribution of each business unit to the portfolio
Budgeting and business evaluation are intertwined, and if the two aren’t coordinated, it can easily lead to massive budget and business failure. It’s crucial that the budgeting team maps and plots the growth factors of each business unit and establishes methods for studying its progress. This will help to allocate resources appropriately based on the performance of each business unit and contribution to the company’s overall revenue.
Allocate resources vertically
Typically, businesses allocate resources horizontally across verticals, resulting in equal distribution of money among them. In this structure, high-growth sectors are left starved of resources while slow growth businesses sit on a pile of cash without generating sufficient ROI.
In the vertical methods, various business units are stacked on top of each other and adequate resources are allocated to the strongest vertical first. Each vertical then gets its share of money based on how it performs. Sometimes, business units right at the bottom might not get a penny, which is good. Eliminating an unprofitable vertical frees up cash flow for the company.
Additionally, businesses can set performance targets for each vertical based on resource allocation. This will help them streamline their operations and achieve immense growth, profitability and success.
How to create a budget for your small business in 7 steps
Small businesses face financial challenges in 66% of cases, with 43% citing operating expenses as their biggest problem. Small businesses are the least likely to have a budget. This is because they find creating one restrictive. Yet, small businesses must create a budget since it allows them to generate consistent growth and drive business forward.
Where large corporations must demonstrate sound financial management to manage their large coffers, small businesses must use creativity to get the most value out of their money since funding doesn’t come easy. As a small business, consider these seven points when creating your budget.
- Examine your revenue: The first step is to determine how much money you have or how much money you make monthly and annually. In other words, add up all the income from all the verticals to determine the gross sales figure. This figure will appear at the top of your financial statements.
- Calculate your fixed cost: Next, you need to calculate your fixed costs. These are costs that remain the same month-over-month like payroll, rent and website hosting.
- Calculate your variable expenses: Variable expenses vary from month to month. These could include your utility bills, shipment and travel expenses, and commissions. Each of these costs has an impact on your profit. By reducing variable costs, you can increase your bottom line and scale up.
- Keep funds aside for one-time charges: A one-time cost is a non-operating expense deducted from a company’s income for a one-off or isolated event that is unlikely to occur again. It could be a cost associated with buying office space, relocating or even putting aside funds to pay a security consultant should a cyber incident occur.
- Renegotiate your deals with vendors: If you have a yearly contract with your vendors, you can renegotiate deals with them each year to get better prices. Small price reductions with multiple vendors can have a significant impact on your profits and contribute to the growth of your business.
- Forecast revenue and profit: Budgeting also involves forecasting your revenue. You can use the forecast to determine the direction your business should take. If you analyze possible future outcomes to estimate the forecast, you are automatically better equipped to handle risks and pitfalls than businesses that simply take everything as it comes.
- Put it all together: Finally, it’s time to add up all the numbers and subtract expenses from income. This will show you your profits, and you will be able to make informed financial decisions. A negative balance means you must reduce your expenses or find ways to increase sales. If your business is profitable, you can take calculated risks that will help you grow.
How to improve your business budget
Often, IT departments are forced to make cuts due to budgeting challenges. However, companies are looking to increase their IT spending this year because of changes brought about by the COVID-19 pandemic and rampant cybercrime. According to Gartner’s 2022 CIO and Technology Executive Survey, CIOs expect IT budgets to grow by 3.6% this year — the fastest rate in more than a decade.
Here are a few budgeting tips businesses can follow to get a better return on their investment.
Use live data: We live in a fast-moving world where trends and circumstances change instantly. In order to keep up, you need to incorporate the latest data into your budget. There’s every possibility you could nip some expenses in the bud and even make more accurate financial projections when you have access to the latest expense and reimbursement reports.
Create both macro and micro budgets: Macro budgets provide a larger picture of an industry, country and economy as a whole. Alternatively, micro budgets can be monthly or weekly budgets that give you a better handle on your expenses, which could otherwise spiral out of control if left unaddressed for too long.
Keep it flexible: Having live data and micro budgets gives you the flexibility to react quickly to changes in the business climate. Small businesses need this important capability, especially since changes in business environments happen at a rapid pace in this day and age.
Align budget with strategy: Once you manage to break even or start operating at a healthy profit margin, you need to align your budget with your strategy. Whether you need to build a new office, expand to new markets, hire new IT specialists or make an acquisition, you can achieve your goal only when your budget and strategy work hand in hand.
A well-documented budget is a well-executed budget: Document all budget discussions and ensure that they are available to all departments so that there is transparency at work and business heads know exactly what they are expected to do and what resources they have.
Have alternative budgets: Budgets designed to accommodate any major changes you expect to impact the company are alternatives budgets. It could be a positive development, like getting a round of funding, or a negative outcome, like not earning revenue during an especially slow period.
Assess your cash flow: With a healthy cash flow, you will never run into pesky liquidity issues that can cripple businesses even with soaring revenues.
Choose the right budgeting methods: There is no one budgeting method that fits all businesses, just as there is no one-size-fits-all business model. You must choose a budgeting method based on your company size, product, objective or goal. You could choose:
- Activity-based budgeting — which is creating a budget based on an end goal.
- Value-based budgeting — which assigns budgets to departments based on the value they generate.
- Zero-based budgeting — where each department’s budget must be justified before funding is provided.
The options are many.
A well-defined IT budget can be a roadmap to your IT strategy. IT budgets are created not only to secure funds from your C-level executives but to also help you identify and execute crucial IT initiatives for your organization. To help you create an annual IT budget more easily, we’ve put together a checklist that not only caters specifically to your IT needs but, on implementation, also helps you maximize the benefits of your IT investments. Click here to download the checklist.