A budget is an essential part of any business. While developing the budget may sound daunting, it should really empower you as a business owner to make educated and informed decisions. Business budgets will help you prepare financially, relieve the stress of the unknown, and provide support in reaching your business goals. What exactly is a business budget? Why do you need a budget? When should you implement a budget? That’s what we’re going to address here.
Why your business needs a budget
Would you buy a house without setting a budget? Chances are, you wouldn’t. So why would you run your business without one? Every business, regardless of age, size, or industry, should have a budget in place to minimize the risk of cash flow issues.
A business budget will take into consideration your revenue and expenses to determine what is reasonable, and just how much revenue it takes to keep your business from seeing red. If you want to run a business that is sustainable and prepared for growth, you will need a budget in place. The budget can give you insight into what your future finances should look like, and how to get there. A business budget can help with various aspects of your business such as:
- Long-term goal setting
- Identifying areas of revenue opportunity
- Identifying expenses to cut back on
- Predicting slow months and planning how to compensate for them
- Ensuring your finances are in order for future investors and bank loans as needed
What to include in a business budget
The first step in developing a business budget is rounding up all of your finances. This process is simplified if you are utilizing a cloud-based accounting app. A cloud-based accounting app, such as Xero, is an incredible tool for organizing business financial data in one place to review. Xero keeps your business finances up to date, providing real-time data and reports needed to develop, implement, analyze, and update your budget.
If your business is already up and running, you will need to gather data on past and current revenue and expenses. This can be done easily with Xero by filtering accounts per period. Looking at past and current data is essential to make projections about future spending and revenue, and how often large, one-time purchases are needed.
Business budgets should include:
- Revenue – if your business has multiple sources of income, you will need to include all sources (online sales, brick and mortar sales, trade shows, freelance work, etc.)
- Fixed expenses – these expenses are your recurring costs. Be careful to properly identify the frequency (rent, insurance, payroll, internet, phone, etc.)
- Variable expenses – different than fixed expenses, variable expenses are recurring, however, the cost may vary (shipping, travel, freelance, and professional consulting costs, utilities, materials, etc.)
- One-time purchases and investments – large expenses that happen less frequently but should still be accounted for (laptops, business furniture, etc.)
- Contingency or emergency fund – your backup plan for the unexpected
A business budget wouldn’t be complete without budgeting for a contingency or emergency fund. If there should be a major disruption in business, your emergency fund will come into play to ensure necessary expenses are covered.
When should a business implement a budget?
Now! If you’re a business owner without a budget, stop what you’re doing, shift gears, and start developing a budget. If your business is in the planning stage, include a budget in the business plan. In the infancy stages of a business, it will be more difficult to develop a budget as there will likely be no financial data to evaluate. In that case, predictions, projections, and industry standards will be essential. Once you have financial data of your own, incorporate that data into your budget for a more realistic, up-to-date budget.
Whatever you do, don’t put a budget on the back burner. A business budget should be a part of the foundation of any business.
When you’re not sure where to get started on your budget
If numbers aren’t you’re thing, the good news is you don’t have to develop a budget on your own. This is an ideal time to work with a financial expert, such as an outsourced CFO. An outsourced or fractional CFO can work with you to examine your past and current finances, incorporating your goals to develop a business budget. If you’re starting from scratch, an outsourced CFO can work with you on making financial projections, and estimates to come up with a budget.
The top reason we recommend our small business clients to seek the expertise of an outsourced CFO is the flexibility. Small businesses rarely have the capital to hire a full-time CFO. Outsourced CFOs can work with your business on a part-time or interim basis to help you at specific points in the business growth cycle.
It’s important to note that a business budget should be evaluated on a regular basis, such as quarterly, semi-annually, or annually. Using past and current data, along with predictions, can help to accommodate for slow seasons to ensure there is adequate cash flow at all times.
Business budgets will help you make well-informed business decisions that can keep your business on the path to success. If you’re not sure where to start, need the assistance of a financial expert, or are looking for a tool to assist in creating and analyzing your budget, send us a message.