Understanding Business Budgeting
Business budget for success
First of all a successful business needs the solid foundations of sound financial management built into its overall strategy. For that reason finances should underpin every aspect of its work. Activities need to be planned and costed, so resources are properly considered.
“Failing to plan is planning to fail,” Benjamin Franklin
“Those who fail to learn from the past are doomed to repeat it.” Winston Churchill.
Likewise Franklin and Churchill, two iconic men whose words that apply to budgeting. Hence budgeting is a powerful approach which is underused in the SME world. Certainly budgeting is big deal when it comes to planning, control, and decision-making.
What is The budget?
Most noteworthy the budget is the document which translates your planned business journey into a financial plan.
A powerful budget…
• is prepared in advance
• may be revised monthly
• explains the costs of business activities
• based on action plans
• a monitoring tool
• forecasts all expenses
• needs to be transparent
• may be long-term or short-term
1. MAKE THE LIST
First of all start making a list of the cost headings linked to your business or project. Rather like writing a shopping list. Consider one off costs, such as capital costs like furniture and computers.
Think about your ongoing expenses, such as rent, salaries, and utility costs.
Then make a list of all likely income headings, such as product sales, grants and donations.
2. FILL IN THE FIGURES
Estimate the cost of each expenditure item, be realistic. Mr Google can be you friend here, so ask him.
Furthermore it’s helpful to look at expenses as fixed or variable:
• Fixed: these remain the same throughout the year and are unaffected by business activity e.g. rent and salaries
• Variable: these fluctuate according to levels of business activity e.g. material costs change according to levels of sales.
Consequently make a note of how you worked out each figure, plus items you’re not sure about. No notes mean you will have to rely on your memory to know. Hence remembering what assumptions you made – enough said!
Now repeat the process for each major source of income: estimate the income from each source. Make notes on how each figure was arrived at. If it’s a guess or broad estimate, say so.
3. REVISE THE FIGURES
Ensure staff and management are a part of the budget conversation by sharing it with them. Make sure you talk to those responsible for delivering specific parts of the service.
Check on the items you weren’t sure about. Is more information needed to improve the accuracy of the estimates?
Revise your notes. People should understand where all the figures have come from, rather than just trust you with the finances.
4. OPTIONS AND WHAT IF’S
If income is less than expenditure? What will you do about it?
What if your income doesn’t materialise, and you have a shortfall? Think about what action you would take. Would you scale down an activity?,cut costs? or delay spending?
Should you plan for other unexpected circumstances?
The budget is ultimately agreed by the senior management team.
6. MONITOR, MEASURE AND RESPOND.
Finally keep an eye on the reality of income and costs against what you thought would happen. Also where there are material differences between reality and plan. Finally find out why and react accordingly.
We’d love to help
Contact us to see how we can help you with your business numbers.
We can have a cup of (virtual or real) coffee, biscuit and a chat about where we can support your business.
Our team have created a wonderful free Budgeting Guide to help you. We used an Arts business to illustrate, but there’s lots of good takeaways for all Business.