Business today is more competitive than ever. Costs are higher, margins are shrinking—so, properly managing your finances is critical to success. One of business finance’s fundamental lessons is how to budget revenue and expenses. This article provides a comprehensive guide to creating and optimizing an effective business budget.
What you need to know
- How to assess your current financial situation
- How to create a budget that reflects your financial goals
- How to track and forecast income and expenses
Assessing your current financial situation
Business financial planning begins with an assessment of your current situation. To start, gather your revenue and expense reports from the past 12 months. These will create a budget strategy for the next 12 months. You can also do this quarterly, but a 12-month look at cash inflows and outflows gives you a better picture of what’s happening.
The data you gather can be used to set up expense tracking and cost control protocols, provided you have the right budgeting software. Look into tools like QuickBooks or NetSuite, then check if your bank has an API to connect them to your business checking account. If that connection is already in place, assessing your current financial situation will be simpler.
Use this opportunity to identify revenue sources and categorize business expenses. Accurate data in both categories can help you with revenue projection and expense reduction. We’ll provide some cash flow management tips later in this article. Focus on what’s already happened. You’ll need that as a baseline to create and manage a business budget.
Setting financial goals
Financial goals for your business could be as simple as achieving financial stability in five years or paying off your business loans in full. Both of these have a cost, which means it will need to be included in the expense column of your budget. Write down your goals, assign each a cost, and classify them as short-term or long-term.
The goal-setting part of budget management is a critical component of this exercise. Let’s say you have a short-term goal of paying off a business credit card with a $10,000 balance. That money needs to come from somewhere. You could pay $1,000 a month for 10 months or pay it off in one lump sum this month. Either way, it needs to be included in your budget.
There’s more to this than simply putting numbers into a spreadsheet. It’s important to align your financial goals with your business growth plans. Remember, each goal has a cost. Ignoring those costs while planning an expansion or a new product launch will lead to a financial shortfall. You can avoid that by having a budget allocation for each goal.
Creating the budget
The first draft of your business budget should have a column for essential expenses and another for non-essential expenses. Essential expenses are rent, utilities, payroll, and other expenses you must pay. Non-essential expenses are budget items that can be eliminated with a little financial discipline. One example is paper reports, which can be cut down with new, paperless tools.
You want a business budget that aligns with your goals, but you also want to build in some flexibility. Marketing, inventory, and materials costs are variable expenses. In the past few years, we’ve learned painfully that those costs can increase anytime. Leave some cushion to account for that, and set aside an emergency fund for unforeseen expenses.
Accurate budgeting is essential for small business finances to work properly. You can check your work by generating a basic profit and loss statement (P&L). It won’t be your actual budget, but it will tell you if the budget you created here will work. If it doesn’t, check the financial forecasting you did for revenue, your fixed costs, and your variable expenses.
Tracking and monitoring
Budget monitoring is an often-overlooked part of this process. Change is the one constant you can count on in business, regardless of your industry. Monitoring your budget can show you where to cut expenses and optimize your cash flow. Doing this frequently ensures that your company will be financially efficient, which increases profitability.
Budget optimization involves revising your numbers to reflect changing circumstances. Cost increases from vendors and suppliers are one example, and revenue increases or decreases are another. When these variables change, the financial equation is altered. Plug the new variables into the budget and run a new P&L. You’ll see the difference.
The right technology makes this easier. Shop around for the best budgeting tools and software to make tracking and monitoring more efficient. Look for platforms that easily connect to your business bank account and accounting software. Automated data flows give you up-to-date, accurate numbers with which to work. You need those to optimize your budget properly.
Forecasting revenue
If you monitor and optimize it frequently, you only need to create a budget from scratch once. You can then use tools to accumulate data and forecast future revenues. It’s not an exact science, but you should be able to project numbers that are close to your actual revenue. Just make sure to account for seasonal changes and economic volatility.
If your forecasted revenue is equal to or lower than your expenses, you might want to try raising your prices. Try multiplying projected sales or services by the new price. Does that change your outlook? You can also look for ways to cut costs to improve your revenue forecast, like renegotiating some vendor contracts.
Market demand, growth rates, and fluctuations in sales volume can affect revenue forecasting, but you can minimize these pitfalls by communicating with your customers. Talk to them via chat and email, send out surveys, and watch consumer purchase behaviors carefully. The products in demand today will be replaced by new products tomorrow.
Managing cash flow for long-term success
Let’s delve into this more deeply. You know your current financial situation, and you’ve set some financial goals. You’ve created a budget and have tracking and monitoring tools in place. Your company has some reliable revenue forecasts. The next step is to optimize cash flow to ensure liquidity. That’s done by minimizing expenses and maximizing revenue.
Fixed costs are hard to change. Landlords don’t lower rent, and utility companies don’t care that their bills are too high. If you want to cut your costs, look at the variable expenses. You can try to bulk order supplies to save on shipping costs, outsource your accounting and/or human resources services, and automate where you can. These are just a few suggestions—there are plenty of places you might be able to shrink variable expenses.
Some of your cost-cutting moves could also maximize your time. Outsourcing time-consuming services frees you up to focus on running your business, while automation can make your employees more efficient. You can look into even more solutions during the free time you’ll have after outsourcing the company’s accounting tasks.
Business budgeting begins by knowing where you are now and where you want to go. Assess your current situation, set short-term and long-term goals, and create your budget. Once it’s done, monitor it regularly and update it frequently. Small business owners who implement these budgeting practices should achieve long-term success.
Business checking that lets you focus less on banking and more on running your business.
