In the age of information overload and uncertainty, even the slightest oversight can lead you to go over budget. It is essential to create a budgetary plan that can protect you from these setbacks and these unexpected developments. Surprisingly, 61% of small businesses didn’t even have a budget in 2018.
We typically create a business budget by following these steps:
- Estimate income.
- Estimate fixed and variable costs.
- Keep a general contingency fund to pay for unexpected expenses.
- Create a profit and loss statement.
- Describe your budget.
But all this cannot guarantee a foolproof budget. You have to think beyond traditional budget planning considerations. If you want to create a budget that never lacks, you cannot limit yourself to these traditional considerations.
This will involve a lot of research, for which you will need to use advanced tools and strategies, consult experts and department heads and collect relevant data.
How to Create a Business Budget
Let’s take a look at a few ways to create a corporate budget which is the least likely to fail.
Conduct cost research at the micro level
Lean organizations are more likely to succeed as a business. So, take a minimalist approach and look for costs at the micro level. Don’t underestimate the cost involved in some of the ventures such as marketing.
A cost-benefit analysis (ABC) will always help you make quick decisions. However, a CBA does not work in more complex situations.
For some projects, cash flows came recurring over different time periods and with varying returns. You can estimate the cost of these projects using a Net present value (NPV) and internal rate of return (IRR).
Have realistic financial projections
To succeed as a startup, predicting revenue and growth is extremely important. You can use advanced tools or hire experts for it. Even a slight error in forecasting cash flow and earnings can spell disaster for your startup.
Estimate your expenses first
At the start-up stage, it is easier to calculate your expenses rather than your income. First estimate the most common expenses such as fixed costs and variable costs.
However, you have to remember the golden rule here.
Advertising and marketing costs are likely to go up, so you should always count them as twice your estimate. Don’t underestimate legal, insurance and licensing fees either.
You can then track your expenses using an app like FreshBooks Where Spend. An app will help you understand the accuracy of your projections and use that information to make even more accurate estimates.
Forecast your income
Have two sets of revenue projections – conservative and aggressive. A conservative projection is the normal realistic estimate, while an aggressive projection is a more optimistic forecast. Aggressive revenue projections can act as a great motivator for your entire team, including investors.
Perform reality checks for key ratios
Working with an aggressive outlook sounds good and brings much-needed optimism. However, to pay your fixed overhead, you need to perform a series of reality checks for key ratios.
Direct Cost Margin = (Revenue – Direct Costs) / Revenue
Estimate your gross profit margin
Gross Margin = (Revenue – Cost of Goods Sold) / Revenue
As your revenue increases, your operating profit margin should increase. Do not presume that the profitability threshold will come early or that you do not need funding to reach this point. This is the real indicator that shows you are doing well as a business. You can cut costs and move up the profit curve.
Use a 12 month cash flow projection
A projection of cash flows clearly tells you how and when money enters your business. Projecting cash flow over a 12-month period will help you get an idea of your expenses on a month-to-month basis. This will help you control your expenses and plan your payments, especially for a seasonal business.
Adjust for uncertainties
Your cash flow projections will remain incomplete if you don’t have a plan to deal with “foreseeable uncertainties” such as payment defaults, late payments, and seasonal fluctuations.
You will also need to consider economic and industry trends to forecast your cash flow and develop a budget.
Defaults, unreliable and late payers
Some customers are habitual latecomers, which affects your cash flow. The best way to deal with such people is to kick them out.
Occasional payment delays should not be authorized more than three times, even if they are large customers. Introduce late payment fees and penalties to discourage late payments and prevent bad debts from being incurred.
If you want to create a budget that never fails, make seasonal fluctuations adjustments. There are peak seasons and there are lean seasons, and you can’t keep shifting the same all year round.
Plan your expenses according to your seasonal needs. For example, you may need to hire temporary staff during peak season. This will help you save money during lean seasons because you wouldn’t be spending on unnecessary labor.
You can use tools like PurchaseEControl to create more accurate budgets that account for seasonal fluctuations. This tool can assign annual and monthly budgets as well as project and multi-year budgets. These are restrictive budgets to ensure that you cannot spend too much without the approval of the right person.
Economic and industrial trends
You can’t make a good budget if you neglect economic and industrial trends. If a particular industry is facing a drop in demand, it is wiser to cut costs and minimize production. Keep an eye on events and forecasts from trusted industry experts.
Sometimes your business may have to face expensive errors, which would suffer unexpected expenses. For example, you might accidentally pay twice for the same order because you lost essential documents.
Minimizing this type of human error can significantly help you reduce unnecessary and unexpected expenses. Automate your workflows and maintain a full audit trail of your orders for it.
Hire consultants for orientation
Hasty, short-term cost-cutting activities won’t work in the long run. Set your goals, seek expert advice, and implement actionable strategies to reduce long-term costs. Hiring consultants is very important for targeted cost reduction.
Technology and other aspects of your business require careful planning. For example, you may not need to invest in an expensive tool just to use it for a project. With the help of a consultant, you may discover alternatives and profitable options that work fairly well.
You might even be able to use free or inexpensive mobile apps instead of a full software suite.
Get insights from managers and project leaders
Your managers and project managers have first-hand experience of your business operations. They might be able to help you identify areas where you are overspending. They might even have ideas and suggestions for improving productivity.
Feel free to outsource certain processes if it is profitable for your business. Determine one-time and necessary expenses and incentivize performance.
Have an emergency plan
Although this is a traditional budget planning consideration, it is always helpful to have a contingency plan. Setbacks and calamities are quite normal these days. Have a financial underperformance plan to minimize losses in critical areas.
Review your budget regularly
Regular budget reviews and a proactive approach always helps. Do not refer to your budget only in times of crisis or setback. If your finances deviate from what you originally planned, revise your budget accordingly. And repeat this process regularly.
Final Thoughts When Creating a Business Budget
According to Grant Cardone, self-made multi-millionaire and entrepreneur, Budgets don’t work. What really works is to reduce costs, find new sources and opportunities to generate income and have a plan to deal with uncertainties and surprises. However, if you create a budget plan using the tips above, you are more likely to succeed in your business.