9 Actionable Tips for Small Business Budgeting

May 29, 2018 Reuben Yonatan

Balancing a budget is rarely simplistic.

But a business with a budget is a business with a goal.

A budget gives your business guidance, clarity, and focus. It gives you the ability to know where your company is and what the future holds if each piece connects properly.

The challenge, of course, is that you can’t see into the future. That’s why you (and your budget) must be flexible. Changes to tax code, tariffs, and worker shortages are just a few of the things that can disrupt your plans — leaving you with no option but to revisit and modify your budget.

Does Your Budget Have Room for Improvement?

How do you balance an ever-changing budget?

You start with a plan and then modify and alter it as you go. These actionable and strategic tips give you a starting point for doing just that. Your goal should be to ensure you always have insight into what your company’s operational needs are. Most importantly, you need to be vigilant in managing your budget on a consistent basis.

Here’s where to start.

#1: Zero in on Sales Forecasts and the Insight They Provide

No matter what numbers you use to create your basic budget, pay close attention to changes in your operations on a consistent basis.

For example, your sales forecasts can help you gain insight into changes you need to make. Consumer sales may pick up due to improving economic conditions. You plan for this in your sales forecasts for the next few weeks, but are you building it back into your budget?

You may need more product, employees, or even more fixed assets. At the same time, if you notice sales begin to drop, it’s time to go back to the budget to adjust funds to realign your goals.

Utilize your sales forecasts as a tool, and use them to modify the company’s budget on a routine basis. Remember, a budget isn’t a set-in-stone plan. It is a flexible, moving target.

#2: Revisit Budgets to Ensure They Much Your Current Financial Status

As noted, your business’s budget needs to be modified on a routine basis. As you notice changes in the way your business is running, revisit your budget. Adjust it to better match the current needs of the company.

Your goal should always be to ensure you are updating your budget to match the current financial status of your business.

For example, the city decides to do some construction work in front of your business. This should instantly signal a budget update. Do you need fewer man-hours for the week? You may need more attention to online marketing instead of relying on your local signage to bring customers in. You may need to change your marketing forecast as well as your budget.

On the other hand, you may see a surge in business due to a weather change. Recognize this, realign the business’s budget for the weekend to ensure you can impress the customers who stop in. It may be as simple as adding more staff or enhancing your product line.

#3: Save Consistently to See Real Results

A key component of any business budget is savings. Without savings, your business may have limited growth potential. With it, you have the opportunity to shore up your business without having to get expensive loans.

Be aware, saving isn’t something you do now and again. You need to be adding to your savings consistently. Dedicate a specific percentage of your income (not profits) to savings — and add it to your budget as you would any other company expense.

Like all other components of your budget, the amount you save should change in value as your budget, sales forecasts, and goals change. However, ensuring it’s a solid, fixed expense in your budget ensures long-term financial growth opportunities for your company.

#4: Pay Attention to Budget Surpluses – They Aren’t a Good Thing

A budget surplus occurs when you experience more funds at the end of the budget period than anticipated. That is, after your budget is created, you find your business has leftover funds.

This is not necessarily a good thing. It happens when your revenue exceeds your expenses, and it may indicate other areas of your budget are lacking because they didn’t have access to the funds they needed.

When a surplus occurs, act on it. Create a strategy to use these funds.

For some companies, surpluses can be put towards savings and growth funds. In other cases, surpluses should go to reducing debt.

In all situations, surpluses should be reinvested into the company. The funds do not automatically equate to more profit in the owner’s pocket. Reinvesting the funds gives your business more leverage later.

#5: Recognize Deficits on an Ongoing Basis – And Act on Them

Deficits occur when revenue falls below the expenses for your company. Be aware, a small deficient can grow rapidly if it isn’t addressed early enough.

As you review your budget, look for all deficits, especially those that seem benign. Then, adjust your budget to address them.

Commonly, a budget deficit occurs from poor budgeting. Even if your revenue dips unexpectedly, it’s important to have a plan to compensate for those losses. Then address deficits as soon as you notice them.

#6: Use Last Year’s Budget as Only a Starting Point

Last year’s budget is a good starting point for this year’s financial plan. But it should only be a guideline.

What is even more valuable is to look at mistakes and areas of concern from last year’s budget. Where did inaccuracies occur? What was the outcome of these deficiencies or mistakes? This is an opportunity to see mistakes so you can plan to avoid them this year.

Most small businesses using accounting software can also use a variance report to show this breakdown. Break it down by months. Look at the differences here. Use them as a way to plan for the next year.

#7: Realize Fixed Costs Can Change Too

Fixed costs typically stay about the same, but they depend on what’s happening within your budget. Fixed costs can change throughout the year due to price increases, raises to employees, or increased taxes. Fixed costs can also change as your company grows (new equipment costs more). Even utility costs can increase. Recognize these small, but important changes.

Be sure your budget makes allowances for adjustments to fixed costs. These costs may not change in the short term, but they will change over time, and you need to account for projected changes down the road.

#8: Accurately Predict Variable Business Expenses

It may seem impossible to calculate variable expenses effectively. After all, they change often. However, the more accurate you can be, the more effective your business’s budget will be.

Most often, rises in variable costs indicate your business is seeing more sales. This may create a pickup in the revenue available to meet these variable costs, but you’ll need to monitor it carefully.

To do this, properly determine the variable contribution margin. Use the price of the product or service you offer or find the variable costs of your items. Subtract the variable costs here from the price.

This is an area many small businesses will benefit from some help by an accountant. Clarity in variable expenses can really create an effective budget.

#9: Plan for One-off Expenses That Could Otherwise Hurt You

The one-off expense, if not planned for, can cause countless financial struggles for businesses. Plan for them instead.

This includes things such as replacing equipment or repairing the business’s vehicle. It may include other types of needs, too. For example, you have an unprotected increase in sales. You recognize it is short term, but you need to onboard temporary workers and pay them now, often for work that won't be paid for some time. This means you need to have the funds on hand to handle such an expense.

One of the best ways to handle one-off expenses is with a rainy day fund. Each month, a portion of your revenue is added to this fund and kept in a separate account. Its purpose? To be available when unexpected expenses arise.

At the end of the day, every small business owner needs to have insight and be ready to take action to address their company’s financial needs. In nearly all cases, working with an accountant alleviates many of these steps.

Your accounting efforts should always focus on what’s happening right now. An accountant can provide more insight into this on a consistent basis. Even if you do it on your own, dedicate time to the process to ensure accuracy at every step.

The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.

 

About the Author

Reuben Yonatan is the founder and CEO of GetVoIP — trusted VoIP comparison resource that helps companies understand and choose a business communication solution for their specific needs. Reuben assists SMBs align business strategy with culture and improve overall corporate infrastructure. Follow him on Twitter @ReubenYonatan

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