Every business starts out with a goal. Whether it's staying afloat for years enough for an ROI and profit, or to grow that business into something bigger, there is always a goal. And like every other goal, we strive for success. Of course, when a business begins to be operational, that goal may evolve into something more and all of that largely depends on your business' financial performance. That's what budgeting is for.
So, what exactly is budgeting?
Budgeting is, essentially, a process of creating an allocation of your funds for expenses that are necessary for your business as wells as funds needed to be set aside as savings. The process of budgeting does not necessarily mean that there is only one plan, as well. After all, you will need to plan for not just one allocation for the business. And budgeting does just that.
In a nutshell, budgeting is a way for businesses to manage their financial performance and use it as reference and guide to keep it on track.
While most people find the term "budgeting" restricting, as it's basically a standard for reference when it comes to spending, you will find that budgeting will actually help you save more and allot more for important business needs.
The pitfalls of not managing your financial performance
Most businesses and individuals will find themselves unable to determine their positions moving forward with no direction to go to or whether there is a substantial growth to their business or their careers to warrant the notion that they are successful. Some may even find themselves without a clear-cut goal to motivate that desire for growth.
It’s not uncommon for most - businesses and individuals, alike - to tend to neglect a key aspect of their financial planning in their focus on the operations and tasks that drive revenue for the business instead of seeing the big picture. While it’s true that monitoring the flow of income is inherently a part of any business, just focusing on this alone will render your goals meaningless without a benchmark to compare your progress to.
To further explain how budgeting helps your business, consider the following:
- You don’t know where your business is moving forward. A budget lets you determine where you are at financially to be able to create business decisions moving towards a certain goal. Without a budget and consequently, without a business plan, you’ll just be like sitting ducks just living day to day in your business.
- You don’t know whether your business is growing. Again, your budget plans should serve as a benchmark to compare your progress to. With a budget plan, you can determine operational costs, predict lean and peak seasons, and determine savings. With that in mind, you can begin to collate and compare your business performance to any given financial goal.
- Your business has no real direction. Not budgeting means you do not have a set plan in which to move the direction of your business to. Not monitoring your business’ financial performance will serve as an obstacle to making sure you are on track to meeting your business goal.
- There is nothing to push your business to grow. Budgeting does not only include the allocation of funds. It also gives businesses a clear picture of where they are at towards attaining their goals which will serve as a motivation.
- You have no target to aspire to. Because budgeting gives you a picture of your financial performance, you get a glimpse of your business’ potential and where it can be headed with just the right planning. With that in mind, a budget plan can help you strategise towards achieving that goal.
What you achieve with budgeting
The first thing to come to mind might be,”Do we really need a budget?” The answer to that is yes, you definitely do.
Imagine the following:
Imagine having something that gives you a picture of where to drive your business to. That’s what budgeting does for you. It gives you a target to achieve.
Now, imagine having something that inspires and pushes you to grow and improve. That’s what budgeting can also do for you. By seeing your progress, your wins and where you can gain to improve, you’ll have something that pushes you to do better.
Some people may balk on the idea of a mere plan to be able to motivate you, but you won’t know if you don’t push yourself, right? With a budget plan, you get to feel the thrill of being in control of your financial progress and see you moving closer and closer to your financial goals.
Aside from being an instrument towards achieving your goal, budgeting teaches you discipline. Because you get to see the big picture financial aspect of your business, you learn to be accountable and properly allocate your business’ funds to where it’s needed most.
How to create your budgeting plan
Determine your income from all sources
The first thing you should do is to break down all your income from all sources. This is especially helpful for businesses who offer a variety of products or services, or both or if your business dabbles in different niches.
Doing this will give you a point of comparison for your income sources as to which ones drive the most income, which ones require more budget, etc.
Identify your fixed costs and when they occur
Fixed costs are those types of costs that do not change on a short-term basis regardless of your business’ performance and activities.
These types of costs include the following:
Include your variable costs (based on your income growth)
Your variable costs are varied costs that depend on your business’ performance and activities.
Examples of variable costs:
- Billable salaries that depend on the time rendered
- Software subscriptions you on charge
Determine one-off spends
Aside from your fixed and variable costs, you will also have to determine and list down one-off expenses for services to help your business such as:
- Website design and development
- Software with one-time license fee
- Branding fees such as logo design, etc.
- Business equipment
Break it up by month
Now, once you’ve determined your total income, where your sources are and the types of expenses you incur, it is now time to break these all down and list them up by month. Doing so will help you determine your cash flow every month and determine how each month compares to the other. By doing this, you will be able to predict peak and lean months of your business.
Organise management reporting by comparing actual vs budget
Now, this is where accountability happens. Keeping track of the cash flow on a regular basis and reporting on your business’ financial position lets you know your business’ progress towards your goal, where your strengths and weaknesses lie and where you need to improve.
Organising a management report will help you compare your actual results against your set budget. By doing so, you will find it easier to adjust according to the budget, move things around to accommodate a much-needed expense or to anticipate and set aside for a future expense.
Now, I’m pretty sure with all that has been discussed above you may find budgeting really daunting. While it’s true that budgeting entails a lot of careful planning and work, you will find that your business will benefit a lot from it. Knowing how much money your business makes, how much money your business spends and how much money you need to have to make sure it’s running and keeping in line with business goals are some of the key ingredients to running a smooth and successful business.
As a recap, your business benefits from budgeting by:
- Helping you determine what expenses are redundant and where you can allocate them better
- Giving you something to aim for in terms of growth
- Giving you the feeling of being in control of the direction to drive your business toward
So trust me, it’s definitely worth the effort.
Download this helpful Budgeting Checklist to ensure you do it right the first time.
Want to know how budgeting can help you move your business towards success? Register to join Budgeting for your Business Success webinar today!