How Should Businesses Make Budgets?
Did you know that the biggest reason startups fail is running out of cash too fast?
Running a business entails proactive management and planning, especially where finances are concerned. Otherwise, organizations risk burning out their resources faster than they can generate revenue. This is where budgeting comes in.
In the simplest terms, budgeting involves determining how and where you’ll spend your money. In this post, we’ll go through the details associated with the practice so that you can predict your cash flow and leverage your forecasts efficiently.
What’s in a Budget?
As you run a business, your costs can accumulate and alter your plans unpredictably; you must match your expenses to your projected income ahead of time.
A budget predicts your company’s costs and revenue and lays out an ideal course of action for your organization to follow. It includes forecasts about sales and the estimated cost of sales and overheads while considering factors like market situation, competitors, and changes in the consumer base. It’s safest to begin at least two months before your fiscal year to give yourself ample time for this activity.
A budget is multifaceted, and the process can vary for each firm, with smaller businesses going for an overarching one and larger companies going for departmental budgets. Some common questions to ask yourself during this process include:
1. How Will Our Operating Expenses and One-Time Costs Play Out? You need to spend money to keep your business running; forecasting these recurring operational expenses and overheads is crucial for budgeting. These can include: ● Premise costs, like rent and mortgage ● Machinery rent and depreciation ● Utility costs ● Transport expenses and vehicle depreciation ● Legal expenses ● Taxes ● Insurance Premiums ● Sales Commissions ● Loan repayment and interests ● Staff wages and benefits ● Marketing, advertisements, and promotional expenses
Go through your past fiscal year’s fixed and operational costs and identify any coming changes. For instance, if you’re building a new office, your utility bills will reflect an increase, and you will incur one-time costs to buy necessary equipment, like computers.
If you’re going through growth, determine the human resources you’ll have to enlist and estimate the cost of procuring them. Include training costs, estimated salaries, bonuses, compensations, and potential wage increases. In this way, break down all your operational and fixed costs and assess each category individually to create a detailed budget.
2. How Will Our Next Year’s Vendor Contracts Look Like? Assess all your vendors individually for whether you will continue with their services or not. For the tier one suppliers you can not proceed without, look through your past fiscal year for your volume of purchases and unit costs they have charged you. Evaluate your sales goals and decide if you need to procure a more significant number of goods and services this time around.
Initiate discussions about contract renewals and amendments within your team per your vendor performances and past year’s spend. Also, enquire about your suppliers’ projections and whether they foresee any price or market situation changes that can affect the charges you’ll incur. In the situation that they predict cost increases, your budget must reflect it.
3. What are Our Company’s Income Sources and Goals? Consider all the revenue streams you’re anticipating building, the type and number of clients you’re expecting to service, and what new vendors you’re hoping to enlist. For instance, if you intend on diversifying your production or expanding your operations onto a new geographical area, you can forecast more revenue and more expenses.
Oversight and Review
Budget creation needs control layers to ensure its reasonability. You need a controller or CFO to review each department’s budget and ensure it’s aligned with the expected revenue generation in the year to come. It’s equally essential to conduct a forecasted vs. reality analysis after a set time period as you proceed with the year to ensure that you’re adhering to the budget and have oversight of your cash flow. Consider your income and analyze the reasons for shortfalls or high turnovers. Do the same with your expenditure for fixed and variable costs and determine if changes in them are causing your turnover to vary. Keep an eye on your cash burn rate and see if it fits your projections.
Do Businesses Really Need a Budget?
If you’re a smaller business, you may wonder whether budget creation is necessary or not. We’ll strongly argue that it is.
A budget lets you efficiently plan your spending, identifies where your resources are going, and consequently enables you to evaluate if you can continue operating and handle emergencies, given your cash flow. Making one per your company’s goals will let you know on time whether you need to arrange for funding or not. Budgets also allow you to ensure you’re getting decent profit margins so you can rectify any shortcomings on time. And after you have established a budget, it will act as a standard against which you can compare your performance.
Should You Outsource Your Budget Creation?
If your company is not ready for a full in-house finance team due to a smaller size or an uncertain financial situation, you should invest in an outsourced advisory. Outsourcing lets you pick and choose the type and depth of services you need depending on where your firm stands. This makes it cost-efficient compared to paying full-time hires you may not need 24/7 yet. Given the necessity of budgeting, we strongly advise having someone else do it instead of overlooking it due to the lack of expertise or finances.
Let Trusteer Help You
An experienced advisory finance and consulting team like ours can help you with creating and assessing a budget. This includes taking your monthly financial statements and analyzing them against your budget to determine whether you’re in line with it and highlighting the consequences they will have for your business in the near future.
We’re flexible in allowing our clients customization per their needs, and that helps them manage their spending optimally. Our experts have helped countless firms before, during, and even after those organizations hired a full in-house finance and accounting team.
Contact us today, and let us handle the number game for you.