The idea of a "budgeting process" scares many business owners. The term sometimes sounds like a Fortune 500 Finance Department made it up. In reality, Budgets have a means of empowering any owner of a SMB. Properly planned and executed, it gives you insight and knowledge, allowing you to make key financial decisions. As a result, this can exponentially increase your company's revenue and growth. For example, a Budget can:
Assist you in figuring out how much to reinvest into your business.
Show you how much revenue is needed to cover short and long-term expenditures.
Help you determine the *right time* and *right number* of people your company can afford to hire.
Budgeting is easier than you think, as long as you work with the correct numbers. What Do I Need?
1. Create an Income Statement Report
This report will let you know if you have a profit or loss. For budgeting, it is best to break it down into two categories:
Income (Revenue): How much are you paid for product sales or services? It is best to break income into two groups ...
Recurring Income (regular revenue from contract work and retainers)
Expected Revenue (a forecast of what you will likely earn)
Expenses (Costs): How much do you spend on people, services, and products to keep your business running? Again, start with two groups ...
Recurring Expenses (monthly payments for rent, payroll, utilities, etc.)
Sundry Costs (one-off expenses that don’t come up very often) After capturing these costs, business owners usually make the mistake of overlooking the following costs of doing business:
Depreciation
Debt Repayment
Payroll/Benefits
2. Forecast Your Cash Flow
Next, it's time to forecast your cash flow. This predicts the money flowing in and out of your business over a given period--usually monthly or quarterly. With this projection, you can predict when you might face cash shortages, enabling you to plan for them in advance. For instance, if you foresee a lower cash flow during a particular month, you can hold off on large purchases, settle debts early, or consider financing.
3. Track Your Actual Budget Creating a budget just gives you the first step. You still need to regularly track your actual to budgeted to see if you meet your figures. Finding discrepancies between your budget and actual gives you insight into areas you need to adjust. Perhaps you overspend on certain expenses, or your income doesn't meet your projections. Whatever the issue, tracking your actual to budget regularly allows you to stay in control of your finances, and adjust accordingly.
4. Test Your Scenarios Once you have your basic budget created, you can start using it as a tool to forecast different scenarios. • What if sales go up by 10%? • What if you add an additional employee? • What happens if your biggest client leaves? You can practically have endless variables, which you can alter based on your business's operating environment.
5. Review and Revise Your Budget Regularly Last, and most essentially, review and revise your budget regularly. Over time, your business will change, and so will your financial needs. Perhaps you expanded your product line, hired more staff, or began serving customers from a different demographic. All these changes can affect your revenue and expenses, making it necessary to review and revise your budget regularly. Typically, an annual review of the overall budget is recommended, but checking in monthly or quarterly can keep you in tune with your financial performance.
Creating a budget for your SMB might appear daunting, but this step ensures your growth in the good times and survival in the tough times. You need to evaluate your revenue streams, understand your expenses, forecast your cash flow, track your actual spending, and review and revise your budget regularly. Remember, your budget should give you financial guidance and direction, helping you plan your business activities and ensure you stay profitable. So, take the time to create one. If you need help, reach out to Bubble Rock Advisors, and we'll create one for you.
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