Having a budget for your business helps to create a roadmap for the year to come. The majority of business owners I encounter know how to keep their daily operations flowing well, but need some guidelines for the financial portion of the business. If you take the time to set up a budget, you can periodically evaluate where the business stands relative to the plan, helping you make timely adjustments when necessary to get you to your ultimate destination with more clarity.
Here are a few tips for a solid and streamlined budgeting process.
Be as detailed as you can.
If you are going to go through the exercise of creating a budget, don’t confine it to large, recurring, or unadjusted prior year figures. Dedicate time to going through each line item, evaluating it for accuracy based on changes that have occurred in your industry, client base, or internal operations. You want to capture all of your costs, not just the most significant ones.
If this is not your first year in business, look at prior year figures as a starting point. Evaluate revenues for changes in customer mix or market trends related to buying habits in your industry. If you are including estimated revenues from new customers, be conservative; you want your budget to be realistic, not best case scenario.
Look at your prior year profit margins and assess changes such as increases in the cost of materials or a new customer that contracted to purchase a large quantity of high margin products. Set a target profit margin based on any internal or external factors that will differ from last year to ensure you’ll have realistic
Review the prior year selling, general, and administrative costs; has there been a rent increase, an adjustment to insurance costs, or shifts in the personnel mix? Did you add on a new maintenance contract that you never had before? Update the budget figures to accurately reflect these known changes.
Know about existing relationships in your account structure.
Perform an analysis of items that have corresponding relationships. If you are going to increase your workforce seven to eight percent from the prior year, have you also increased health insurance costs and payroll taxes? If you are a manufacturer and recently purchased a large piece of equipment, did you also modify future utilities expenses? Being aware of the relationships between these related expenditures is not only an important consideration when making the original
purchase, but should also be reflected in your upcoming budget to keep it as accurate as possible.
Don’t slap it together last minute.
Carve out a decent amount of time to go through this important exercise. Start the process early and revisit often through the year if you can, to keep on top
of larger one-time expenditures and evaluate whether they will occur at a similar rate next year.
Review draft budgeted amounts with key employees so they will know what will be expected in the year to come. Go through multiple iterations if necessary to get buy-in from everyone involved; working out any kinks ahead of time will be key to staying on track when sticking to the budget you created together.
Remain open-minded to modifications.
As you begin the new year and you find a recurring expense was inadvertently omitted, don’t wait until next year to adjust the next budget. Make the change
now to keep things as close to actual as possible. Revisit your current year budget at least quarterly and be okay with making small changes as you go along. When it comes time to start the process for the next year, all of these tweaks will help out tremendously.
Having a tool to assist with analyzing the financial performance of your company will provide valuable insight into how to make timely improvements and can lead to greater opportunities to improve your business.
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