Budgeting in business is vital and today we’re going to highlight some budgeting strategies that ensure your budget helps you reach your goals.
“A budget that is well thought out and constructed properly allows a business to track their progress, to find out what is working,” explains Kerry Foster, Finatics Virtual CFO. “It helps to inform the daily decisions being made and it is a useful way of measuring performance against expectations.”
When preparing to start the budgeting and forecasting process, keep these budgeting strategies in mind:
- Be positive! Successful businesses rely on budgeting and forecasting.
Sure, it might seem arduous, but having a good attitude about budgeting is half the battle. Consider this another business tool that will help you to figure out cash flow and identify any areas of strengths and concerns.
- Involve your team in the budgeting process.
The best budgets have input from key people in the business — not just one person or management. Who should be on your budgeting team? This is the ideal time to invite varied perspectives so that you get the best information for building the budget. For example, who will know the most about when to replace equipment? Or which seasons are less busy?
Pro tip: Outsourcing your accounting is a great strategy for small- and medium-organizations to access the expertise and depth of knowledge of an accounting team and Virtual CFO. This includes understanding how current business environment changes can affect your business and forecasting.
- Determine which type of budget best suits your business needs.
Depending on the size of the business, an annual budget may be broken down by month or by quarter. If business is seasonal, the budget process can show the months/quarters with the lower revenue to allow you to save from the months with the higher revenue or vice versa. You can amend the budget during the year as needed. Many companies prepare annual operating budgets as well as project budgets (for specific project costs), and capital budgets (to plan for future costs of things like renovations, computers, software, or equipment).
Evaluating the budget against actual performance can help you assess if you are sticking to your plans, and it allows you to identify opportunities and problems so that you can adjust course as necessary. For example, if sales are higher than anticipated, can you hire staff, pay off some debt, or save for capital expenditures? Alternatively, if sales are lower than expected, do you need to cut expenditures, are you able to make necessary payments, or are you going to have an inventory problem?
When budgeting, there are many different approaches. For instance, worst, average, and best case scenarios, zero-based budgeting and break-even budgeting methods. Your accounting team will be able to advise which is the best for your business situation.
- Hope for the best, but plan for the worst.
As we’ve seen in the last year with the pandemic, businesses need to be prepared for the unexpected. There are different ways to do this in your budget process. For example, you might dedicate a line item to a contingency or emergency fund. It’s especially wise to set aside some savings during successful years so that you’re ready for any downturns or other problems.
- Be realistic and brutally honest during the budgeting and forecasting process.
The most important thing is for business owners to be honest about their expectations and the reality of their business. Sometimes business leaders or owners are tempted to minimize issues or gloss over problems, but this is counterproductive. The more realistic, detailed, and accurate the information used to create a budget is, the better the process will be and the more useful the budget will be.
- Be focused and work your way through each part of the process.
When building a budget there are four main segments, Revenue, Direct Costs and/or Cost of Goods Sold, Administrative Expenses and Capital.
For a Revenue budget looking at historical sales trends (maybe by customer, customer type, geographical locations, etc) along with new sales initiatives (this would be both in dollars and units sold) is a good starting point.
When calculating the Direct Costs and/or CoGS, a breakdown of the historical costs along with improvement initiatives, volume purchasing and labour rates are imperative — while also being dynamic with your sales budget as they are directly related to each other.
The Administrative Expenses should be detailed enough to be able to analyze on a monthly or quarterly basis. This includes breaking down recurring expenses, repair and maintenance, overhead wages, utilities, loan interest, etc. These should include both variable and fixed costs. The key here is to be detailed, so each individual item can be questioned on usefulness and if required.
Lastly, the Capital budget is where you plan to purchase, improve, or sell capital assets. Depending on the type of organization, this could be a tiny portion of the budget process or a major portion if there are a lot of capital assets. Budgeting in this category helps with future repair and maintenance budgets, managing cash flow (potentially raising funds to finance the capital), and planning where resources need to be deployed.
Having the right chart of accounts setup will assist with this process and it could be a good time to reassess and make changes, such as combining accounts and breaking down other accounts for more detailed reporting.
Pro tip: An accounting team can help you with figuring out the financial relationships that are inevitable in every budget. There are instances where changes made to one line item will affect others. For example, changes in revenue directly impact the cost of goods sold, while budgeting to hire a new employee is going to proportionally increase benefit costs. An accounting team can also help with implementing new accounting software to make all of your financial planning more efficient.
As we discussed in our last blog, budgeting in business is vital. It’s imperative you take time for budgeting strategies and gathering all the financial information required for a comprehensive budget.
“A good budget process helps you look realistically at your business and how it is operating,” stressed Kerry. “It becomes a tool for you and your team members to use, either as an incentive to look for cost savings or to improve productivity.”
Watch for the next blog in our four-part series on the importance of budgeting and forecasting, where we’ll explore forecasting.
Interested in having a virtual Accounting Team help with the budgeting process and financial planning for your business? Please contact Finatics Accounting Solutions. We offer a complimentary consultation.