Planning for Sucess: The Top Four Reasons to Make a Budget for your Business

budget_how-to_What_Is_A_Budget

Peter Thelen Sr. CPA

Like most small business owners, your role is likely defined by your versatility - in fact, on most days you probably feel like you have five or more jobs rolled into one. 

One day you might be a digital marketer and the next, a customer service consultant. As your business grows through different seasons, your ever-changing roles will naturally adapt to your business environment. Some of these roles can feel intuitive, leveraging your multi-disciplined expertise or soft skills you’ve gained through years of hard-earned experience. 

Conversely, balancing your business’s bottom line can feel overwhelming, especially as you simultaneously navigate core business challenges, analyze market opportunities, and run on-the-ground business on a daily basis.   

For your small business to grow into the future, it’s vital that you begin with a solid foundation. From obtaining bank loans to weathering unexpected storms, a business budget empowers you to develop crucial insights that can curtail wasteful spending and reach profitability faster.

What is a Business Budget?

A business budget is a comprehensive overview of your business’s finances that acts as a spending plan for your business based on your income and expenses. 

Seasonality of revenues, fluctuating material costs, sales commissions, an unpredictable economic climate, and countless additional factors mean your income and expenses likely change on a month-to-month basis. To harness the full power of a business budget, it needs to be a living document - one that’s accurate and consistently updated. 

Through this agility, you’ll be able to analyze inconsistencies, accommodate unexpected changes, identify unnecessary expenses, and plan for future growth.

In this blog post, we’ll look at four ways a business budget can define the trajectory of your business and enable you to reach success.  

HOW WE CAN HELP

Reach Your Business Goals, Faster

The first step to a successful business budget is insightful goal-setting. Before considering your budget, it’s vital that you identify the areas your business can improve on over the short and long term. 

For example, short-term goals may include paying off debt or purchasing essential equipment while long-term goals might include leasing office space, expanding your team, or launching a marketing campaign.

Keeping a clear focus on your Mission Vision and Values in this process will ensure that your annual budget will align with your three- and five-year goals.

To ensure you’re on an efficient path to achieving your goals, your goal-setting should be SMART. That means Specific, Measurable, Achievable, Relevant, and Time-Bound. By doing this, you can ensure the goals you’re setting are realistic and based on your business’s proven capacity to achieve.

Using the example of expanding your team, one of your SMART goals might look like this:

Hire one additional sales consultant by the end of the financial year. 

Through the SMART methodology, you’ll have a comprehensive understanding of how much time you have to reach your goal and the steps your business needs to take. 

When budgeting, always ensure that you’re financially prepared for the entire process, so for this example, you budget for recruitment, training a new hire, and adding their salary expenses or potential sales commission to your business budget.

Understand Your Income Sources

As a small business owner, you probably already have a good idea of how much money your business is bringing in on a monthly basis - but do you know exactly where all of that money is coming from?

Even if you offer a single service or product, it’s still important to analyze where the income is originating from because this can help you identify lucrative contracts, sales sources, potential growth areas, and your target audience. 

For example, if you sell confectioneries, your business budget can aid you in realizing that the majority of your sales are being driven by your website. You may also find that most sales are taking place within the first week of the month. By leveraging this valuable information, you can begin creating strategies to further increase your website traffic and boost lagging mid-month sales.

If you offer multiple products and services - for example, plant sales, installation, and maintenance - identifying which areas bring in the bulk of your income is vital for anticipating your business’s future growth areas. 

Likewise, identifying poorly-performing areas enables you to gather data that can inform a strategic decision on whether to shift your business’s focus onto stronger revenue streams or try to revitalize poor performers. 

No matter how many income sources your business has, it’s important that any and all income that’s coming into your business is accounted for. From there, all of these sources added together will generate a clear overview of your monthly income.

 

Cut Back on Unnecessary Expenses

No matter how impressive your business’s overall income is, it can only truly be considered within the context of your business expenses. 

When considering your expenses for your business budget, they should be divided into three categories:

  • Variable expenses: These fluctuate monthly and can include material costs, gas, and sales commission. Your variable expenses are typically further divided into direct expenses and indirect expenses. Your direct expense is the labor and material used for each dollar of revenue produced, while your indirect expense is your sales labor, sales commission, and gas.
  • Fixed expenses: These are expenses that stay relatively the same each month. For example, rent, your phone, internet bill, and payroll costs. Typically referred to as your overhead cost.
  • One-time expenses: Repairing or replacing damaged equipment can be a costly unforeseen expense. Having a business budget enables you to draw from historical data to create a buffer for these instances.

After your direct expenses have been subtracted from your income, what remains is your gross profit These are the dollars left to cover the other expenses of operating your business. After all expenses, variable, fixed, and one-time expenses are subtracted from your income you are left with your Net Operating income. 

Gross profit margins vary wildly from industry to industry and even season to season. That’s why an accurate and up-to-date business budget is so important in helping you prepare your business for both expected and unexpected highs and lows. When setting your gross profit margin goal, keep in mind your industry benchmarks for what exactly you’re selling. If you have a unique product or niche, you may want to hire a consultant to help you establish the best gross profit and net operating income margins to use in building your budget.

Predict the Future of Your Business

Unpredictability is an unavoidable part of being a business owner, but your budget can be more than a roadmap - it can help you predict the future of your business.

Successful businesses invest immeasurable amounts of time and energy into creating realistic and accurate budgets because they’re such an efficient way of using historical data to drive your goals and decisions into the future. 

By gaining valuable insights into your business’s financial results, cash flow, and expenses, your budget provides you with a reliable framework that works to inform your financial objectives, growth forecast, and expectations for the next financial year.  

From managing your money more effectively and tracking your business’s performance, to improving decision-making and predicting problems before they occur, creating a comprehensive budget is as close as a business owner can get to an all-seeing crystal ball.  

Our Final Thoughts

The best time to create a business budget is now, whether you are in the planning phases of setting up a business and need to create a Pro-forma business projection or you are already operating a business and just don’t have a financial road map to guide you.

As a business owner, taking calculated risks is part of your makeup. A comprehensive budget is a backbone of understanding how your business is performing and which risks are worth taking. More than simply an overview of your finances, a business budget is an essential first step to a sustainable, successful business.

It’s daunting to step outside of your area of business expertise, but you don’t need to take the step alone. For support in creating a comprehensive budget that facilitates your business’s growth into the future, contact us today to find out how Thelen Financial can help give you the foundation you need to secure a thriving future for your business.

Peter Thelen, CPA

About the Author

Peter Thelen, a licensed CPA, has served at the top of operating service companies and brings significant operational and financial experience to the partnership. As fractional CFO and COO consultants, we can provide the financial and operational support you need to get your business to the next level.