Successful business owners start planning their annual budget early. In fact, now is the time to start. But relax: It can be a simple task. And when the planning process is wisely handled, the benefits of budgeting will far outweigh the cost of time spent preparing it.
Budgets should not be time-wasting exercises without staying power. To create a useful budget that will stand up through the following year, you shouldn’t be spending much time jotting down figures on a page; it’s clear thinking that will produce a strong financial model.
Budget according to business type
A budget should be as simple as the business type it embodies. A one-person operation, for instance, will probably have a basic budget that easily adjusts to rapidly changing conditions. A store or company with several employees generally requires a more refined budget. But take note: Detail is not the aim. Your objective is a useful plan.
A business budget is more than numbers on a spreadsheet. Instead, budgeting is a thought-provoking process. By creating a budget, you’re quantifying your expectations for the future. The process forces you to predict what’s likely to happen as a result of your intended actions. And with a budget, you also calculate the predicted impact of industry trends, demographic changes, and general economic conditions.
Build in flexibility
The simpler your budget, the easier it will be to compare with actual results. And you can always alter the budget for changing circumstances.
Budget planning begins with differentiating fixed and variable costs. Some business costs are fixed monthly amounts, but many other costs are dependent on the revenue you bring in.
When expected revenue changes as actual results unfold, it should be easy to revise the upcoming variable expenses as percentages of sales. Costs directly related to sales volume are either moved forward or scaled back, depending on the way the revenue is going.
With both fixed and variable expenses considered, your other concern is major nonrecurring expenditures. Your budget should give you confidence that spending plans are reasonable based on cash flow. If the budget shows available liquidity, you can plan for major expenditures. As the year unfolds with better- or worse-than-expected results, you can shift these expenditures to occur either sooner or later according to the level of importance you assigned to them.
Think before quantifying
Budgets ultimately save money because they compel you to prioritize. Adjustments to your budget assumptions depend on the thinking you did before you actually began quantifying anything. Although expenses are a certainty in business, cash is a limited resource. Budgeting identifies how much money to allocate for each category of expenditure and tells you when you can afford nonrecurring cash outlays for important but revenue-sensitive items, such as training, new equipment, staff additions, or a special marketing campaign.
Because budgeting entails as much thinking as calculating, it’s a wise move for all business operators to begin the mental portion of the process well before the year-end…like now!