Creating a budget for your business is one of the most important things you can do for your company. It does not matter if sales are spectacular if you do not know the cost of getting those sales or if you are not appropriately planning for future investments. Here are 10 ideas to help your budgeting effort be as accurate as possible:
1. Be Pessimistic -- It is perfectly acceptable to run an optimistic budget scenario but you should also stress test that scenario to show a pessimistic or worst-case view. For example, run a scenario that only includes revenue that is guaranteed and assume higher than expected variable and fixed costs. Never round down. If you cannot seem to let yourself take a truly pessimistic viewpoint, hire a qualified financial consultant to help with your budget. Of course, we think you should hire us. :)
2. Take Your Time -- The budgeting process can be time-consuming, but it is absolutely necessary to run a successful company. If you cannot afford to hire someone else to help with your budget, be sure to mark sufficient time on your calendar to plan your budget every year. Also designate time every month to review the budget and compare it to actual performance.
3. Evaluate Your Risks -- What are the current financial risks involved with your industry, your location, and your business? Is your business in a flood zone? Are there new competitors or new products on the market that are more sophisticated than yours? Budget properly for insurance costs, research and development, new hires, and any other risk your business may face. Again, pessimism comes in handy here. Prepare for the worst; it can save you money later.
4. Shop Around -- When you start putting fixed and variable costs into your budget, take some time to evaluate what you are currently paying for supplies, rent, etc. Is it possible there is a better product out there at a lower cost? Do the research or assign someone on your staff to do it and negotiate prices accordingly.
5. Understand Cash Flow and Profit -- Positive cash flow is a key indicator that your business is healthy. Cash flow is the net amount of money that flows in and out of your business each month. Always remember that net income is not the same as cash flow. Many factors contribute to the difference between net income and cash flow and each should be considered and calculated as part of the budgeting process. For example, you may have substantial sales flowing into accounts receivable but if customers are slow to pay, you could have negative cash flow, which is the life blood of your business.
6. Consider Your Sales Cycle -- When is your company’s off season, and how much do sales drop during this period? How much more money do you typically make in your busiest season? If you are a fairly new business and don’t know these answers, do some industry research and estimate your income accordingly when planning your first budget.
7. Plan for Future Investments -- Every business needs to consider future investments needed for growth. Keeping this in mind for budgeting is essential. What will your business need to succeed and grow in the next few years? Will you need to hire more employees? Do you need more advanced technology or machinery? Calculate the costs of these future investments and plan to reinvest profits accordingly.
8. Adjust Your Budget as Needed -- Best practice is to update your budget on a monthly basis by capturing actuals-to-date and updating assumptions for the rest of the year. At a minimum, you should revisit your budget at least quarterly. A regular update to the budget creates better accuracy in projections because you are continually forecasting from your current actual financial position.
9. Utilize Excel -- There are an abundance of software applications available to support the budgeting process but nothing is as flexible as a good spreadsheet. Every business is unique and no software tool can fully account for all of the nuances in your business. We have reviewed many different software tools but we always come back to Excel as the best tool for developing a budgeting and forecasting model. Once the budget is developed, it is usually quite simple to upload the budget into your accounting system for certain reporting purposes.
10. Utilize Your Data -- Having a budget allows you to answer important questions about the performance of your business. Be sure to compare the estimated sales to actual sales. Where do they differ and why? What were the unexpected expenses, and when was your busiest time of year? These are only a few of the many insights you can draw out of a good reporting system that includes budget data.
If you’re looking for more budgeting support for your small business, then speak with our professionals at VantageCFO. We have extensive experience in working with many small businesses and through our CFO Consulting Services we can help with creating a right sized budget for you so you can focus on your business. Contact us today for your initial consultation.