Budgets for businesses can be confusing and often seem to be limiting. Yet, every business has a goal. That goal could be growth and scaling and often involves a revenue goal.
For some companies, their goal is to reach a profitability level that helps them feel secure and successful. For others, how much cash the business generates is critical.
Any time a goal exists, no matter what that goal is, there has to be a set of specific steps to help keep the business (and those managing it) accountable. Without actionable steps like this, it’s difficult to reach that goal. Budgets provide these steps and create the accountability that most organizations need.
Look at a budget like this as a process that creates success with the goals your organization establishes. Building a budget and using it to help run your business is then easier to do and beneficial.
Budgeting Methods
Choosing the right budgeting method for your organization is essential in this process. Here are the most common methods used.
- Incremental budgeting: This is a commonly used method that involves adjusting the last fiscal or the existing period’s budget by a specific percentage to obtain the new budget. It’s based on the assumptions for expenditures that have occurred in the past with a bit more.
- Activity-based budgeting: A top-down approach to budgeting, this method analyzes the business’s activity to predict the operating budget and future costs. Activities are any type of incurred cost. Under this method, an accountant identifies cost drivers and relevant activities, determines the projected total units for those activities, and estimates the cost per unit of activity.
- Zero-based budgeting: This budget starts from the beginning with all budgets being zero and then rebuilds from that point for the fiscal period. This method is best for those situations when change is common.
- Value proposition budgeting: This method is a mid-ground between zero-based budgeting and incremental budgeting. It eliminates unnecessary expenses by focusing on expenditures and deciding if their value justifies the cost.
- Flexible budgeting: A flexible budget isn’t static, which means it can ebb and flow to meet the business’s needs. This budget method is best for those who have varied incomes and need flexibility.
Building a Budget
Once you select the preferred budgeting method, the next step is to build that budget. There are a few steps to doing this.
#1: Calculate income
Calculate all income coming into the business each month and where it is coming from. Sales figures are a good starting point for this.
#2: Total your expenses
Your expenses include everything from fixed costs such as rental payments, utilities, website hosting, and even payroll costs.
It also needs to include variable expenses. That may be utility bills that change month-to-month and other costs that change often.
Also, include unique expenses or one-time spending. This may be the purchase of something big for the company, like computer systems.
#3: Combine it all
Pull all of this information together for a view of the month. Add up your total income and total expenses separately. Then, compare this to your cash flow (income) into the company.
#4: Use your budget
Don’t forget this step. It’s critical to create a budget that’s accurate so you can follow it. Put it into practice by using it on a daily basis.
Using Your Budget in Your Business
Your budget is mainly used as an accountability tool for reaching your goals. Budgets like this help to forecast the expected earnings for your company and help you plan ahead for expenses. When in use, you can see exactly where your company is on track to meeting those goals. Use it to see the differences between what you planned and your actuals. This is your budget vs actuals report. It provides key information about the company’s current financial health.
When you use your budget to hold yourself accountable, you’ll reach your goals more easily. You can see what’s happening over time. You can also make changes as you strive for better outcomes.
Build Your Budget with the Help of an Experienced Accountant
Budgets carry a lot of weight for businesses. The better your budget is and how close you follow it really does determine your success. When you put the time in to create a budget like this, you could help provide your business with a path toward financial success.
Pasquesi Partners can help you throughout this process. That includes building your budget for your company using the method most appropriate to your situation. We can also support you as you use your budget to grow your business. Our specialized accountants can help to make a difference in your results.
Contact us now to learn more about how we can help you. Put your business on the path to financial stability with insight and guidance as you work to build your budget.