Budgeting is the central nervous system of a business; however, it is not an easy exercise. If you are looking to help drive your business’s financial future in the right direction, budgeting correctly can make all the difference in the world.
A good budget can have a knock-on effect on all your business operations, so here are five tips to help build an effective business budget.
1. Understand What a Budget is
A budget is not meant to manage every penny spent. It is simply a guide to assist you in making better spending decisions and can be an eye-opening tool for areas that need improvement.
When creating a budget, mindset is everything. A negative attitude about budget diminishes your chances of creating a budget your company will be able to stick to. Instead of seeing it as a hurdle, consider a budget as a positive tool that will help guide your business in the right direction.
Some companies find it better to budget on an accrual basis while others like to focus on cash flow, so finding the right type for your industry is important.
2. Know Your Organization
A thorough understanding of the risks associated with your business and industry is imperative for effective budgeting. A business with seasonal trends will likely need quarterly budget breakdowns.
Being aware of any impending changes surrounding tax and regulations is also important. Compare your business to the industry standard using your CPA’s tools and resources.
3. Build the Right Team
A budget should never be created by one person. If certain groups of employees are going to be held accountable for the budget, then they should also have something to do with the creation of it. Usually a management task, sometimes other individuals can bring a fresh perspective to the budgeting table.
4. Be Realistic
A budget isn’t effective if it is designed toward a targeted number. Unrealistic and unattainable budgets are often scoffed at by employees.
Develop your budget according to past results and future projections. Analyse results from up to five years ago as a starting point. Once this is done, enter fixed and inevitable costs first. Then, accounts and line items that have fluctuated drastically over the past few years can be analysed according to what has caused the fluctuations and whether they can be better controlled.
5. Be Conservative
Some level of the unknown needs to be factored into a business budget. There is always an unexpected element to any project you undertake. Make sure you plan for contingencies and future years. Economic downturns are inevitable, and so a strong year should not only create a balanced budget but also a cushion for anticipated rainy days.
Budgeting requires the owner/manager to have an intimate knowledge of the company finances and a good understanding of seasonal changes in finances. A budget can work as a great incentive to stay afloat and in charge of controllable and uncontrollable expenses.