A budget is an essential financial tool for your business, but creating an actionable budget is often difficult. Many business owners create a budget at the start of the year–only to stray from it within a few months.
This article will go over some tips and tricks for creating a business budget that you can actually use.
Your Budget Has to Connect to Your Business Goals
Connecting a business’s budget with its goal is crucial for effective financial management and overall success. Aligning your business goals and budget helps your company:
- Focus on priorities by ensuring funds are allocated to the most important expenses, projects, or investments.
- Optimize the use of resources efficiently and effectively.
- Measure the success or challenges of financial goals and identify areas of improvement or adjustment.
- Make informed, data-driven financial decisions to reach your goals.
- Identify and proactively account for potential financial risks that could hold you back from reaching your business goals.
Create a Budget That Follows These Guidelines So You Actually Use It
Set Realistic Revenue Projections
Revenue projections are a type of financial projection you can use to estimate the revenue you expect your business to bring in over a period of time. Most business owners create several revenue projections for both short and long-term timelines. For example, you might create a revenue projection for the next six months as well as the next year.
The key to a useful budget is to start with an accurate number for your predicted revenue. Overestimating your revenue can leave you without enough funds to cover regular business expenses and rushing to improve cash flow. On the other hand, underestimating your revenue might make it difficult to efficiently allocate the extra funds in your budget.
To get an accurate revenue projection, look to your historical data and current market trends to help answer these questions:
- What is your average revenue over the last 3-5 years?
- What was your revenue from the last year? Was it higher or lower than expected?
- Are there any current market trends or consumer preferences that could impact your revenue?
Make sure your projection framework allows for flexibility. A flexible framework helps you adjust your projections as necessary if market conditions change.
Be Thorough in Your Expense Planning
Planning out your expenses is one of the most important steps of budget forecasting. Your expenses tell you where your business revenue is going–and give you insights into how you can better optimize funds in the future.
To get the most out of your budget, your expense planning needs to be thorough and accurate. Plan to allocate your resources based on priority and need. That is, your most important expenses should be accounted for first while less-important expenses should be added later.
Don’t be too conservative when planning expenses in your budget. Like a revenue projection, underestimating expenses can quickly cause problems in your cash flow. In addition, allocating too little to expenses can be discouraging and make it seem like the budget failed. A budget with accurate expense estimates will be much stronger than a conservative one.
As you allocate expenses in your budget, look for patterns or areas of cost inefficiency. The goal is to find places in your budget where you can cut costs without hurting the efficiency of your business.
Technology is Your Friend
There are seemingly endless options for accounting and financial management software for small businesses these days. That’s good news for you as a business owner. It opens up the chance to automate some of your accounting and financial processes.
How does automating financial processes help you?
First, it frees up more of your time to work on other projects and tasks for your business. Second, technology can help improve the accuracy of your financial data, as there’s less risk of typos or other human errors.
You can even improve the benefits of technology by incorporating real-time reporting into your financial data. Real-time reporting tells you where your business financials stand at any given time to improve your decision-making.
Work KPIs Into Your Budgeting
Your KPIs and budget should work together to help you reach your business goals. To do this, you’ll need to select and track financial KPIs that align with your business goals. Common financial KPIs include:
- Days sales outstanding – measures the average number of days it takes for a company to collect payment after a sale has been made.
- Cash burn rate – the rate a company uses its available cash over a specific period.
- Cash runway – the estimated time a company can operate with its current cash balance before running out of funds.
- Revenue growth rate – the percentage increase in a company’s total revenue over a specified period.
Once you’ve selected KPIs, you can measure their performance against your budget. If they’re on track, you may not need to adjust your budget. If they’re not, however, you can use the information from your KPI metrics to adjust and improve your budget based on current financial data.
Set Time for Regular Review
Contrary to popular belief, budgets are not static documents. Your budget can–and should–be a flexible, adjustable plan for your business finances.
Set aside time to regularly review your budget to help you stay on track throughout the year. During your review, look for trends, variances, and potential inaccuracies. Then, use the data you find to form insights and make adjustments to your budget.
For example, you might find that you’re spending less on employee payroll than you projected. You adjust the budget to reflect the more accurate expense. This frees up more cash that you can allocate elsewhere in your business, such as investing in advertising or paying off business debt.
Build Your Budget So You Can Use It
A budget helps you plan out ongoing expenses, plan for future growth through investments, and make the most of your company’s revenue.
But, your budget won’t do you any good if you don’t use it. Implementing these budget-building strategies will give you a budget that is easy to follow and adjust to fit your business needs.
The good news? You don’t have to manage your finances on your own. At Pasquesi Partners, we know it can be challenging to create a small business budget that aligns with your goals–and is easy to follow. We help business owners take the guesswork out of budgeting through expert financial planning, management, and accounting services.
Get started and talk to an expert today to learn more!