How to Budget for Your Business
November 9, 2017 by Gregg Roberts
Yogi Berra famously once said “When you come to a fork in the road, take it.” Unfortunately, daily decision making in an organization can have the same confusion if we don’t have a plan and follow it. Think of your business as a compass for your finances. The opportunities your business will obtain will improve with the use of a budget, a great tool to assist you in attaining your financial goals. A properly made budget helps you:
- Forecast income and expenses
- Control cash flow
- Relay financial goals
- Evaluate your company’s performance
You’re busy as an entrepreneur, you work with your own finances, employees, clients and all other aspects of your business. There just isn’t enough time or possibly financial expertise to establish plans for predicting income and expenses, which is why our professionals can handle that for you. Developing a yearly budget for your business allows you to review the business’ finances, progress or its overall processes.
Benefits of Budgeting – Some factors which are essential to the success of your business can be identified by developing a budget. These factors can be observed closely over the year and adjustments for critical variances can be made as the year progresses instead of waiting until it is too late.
Communicate Expectations – Documenting your goals and expectations gives you a time frame and ability to share your expectations with people inside your organization as well as significant third parties, such as bankers, to help make it real and attainable.
Anticipate Future Cash Needs – The life-blood of any business is cash-flow. Anticipating sources and uses of cash to determine cash needs for the year will more than likely be determined by your budget. These estimates will be helpful when deciding if there will be sufficient cash flow for the year’s operations or if further sources of cash will be required to attain financial goals.
Monitor Actual Performance – More than likely, your budget will be different than your actual business results. By comparing actual numbers to those anticipated, you will be able to examine the discrepancies and, if needed, limit the factors which caused these differences.
Enhance Decision-Making – Comparing your budget to actual results will give you information which will allow you to change some of the working elements of your business. In this way, a budget may lead to more real-world decision-making. The process and mechanics of budgeting vary by organization. Generally, budgeting consists of three phases: research, analysis, and documentation and communication. Each stage can deliver valued understandings into your business practices.
Evaluate your revenue position – By asking the following questions it will be easier to determine what revenue goals are realistic: Who are your customers? Who is your competition? What economic or technological changes are going on that may disturb your profits? How much fluctuation do you have in your revenue stream? These and other questions about your industry and your position in that industry must be addressed to reach a compromising, accurate budget.
Understand the cost structure of your business – After you’ve asked yourself about your revenue position you need to ask more questions. To generate anticipated future sales volume, you should identify the costs accrued from previous years. What costs were accrued last year? Which costs were variable and which are fixed? Are there unusual, nonrecurring costs which should be estimated? All costs should be estimated based on the activity last year, plus inflation, along with the volume of business activity planned.
Research your competitors’ businesses – Where is your competition focusing their energy? How do you stack up against others in your industry? How is your competition spending their money? What is their revenue like? How do they structure costs different from yours? Researching the costs and profits of the competition in your industry can help provide reasonable guidelines for evaluating your own cost structure.
With the information learned from your research and a clear understanding of your own goals, you can predict anticipated revenue and costs for the following year. After you’ve evaluated every scenario and estimated the influence of each cost, you will need to decide on one revenue and one set of expenses to indicate your expectations.
3. Document and Communicate the Budget
Although the budgeting process itself is helpful, several more benefits can be added by simply documenting and communicating the final budget. To ensure your budget is an effective management tool, you must be able to compare budgeted versus actual results. For example, a budget that measures sales by type must have a reporting system which maintains the data necessary to provide actual sales results by type.
Developing the Budget – Developing a beneficial budget takes time. We can help guide you through this process and offer advice for setting obtainable expectations, while making the most of your time. At Gordon Advisors, we have the experience and background to complete a financial analysis of your business. After all steps are completed, we can help you prepare an actual useful budget which meets the financial goals of your business.
Our Professionals Will Help You
- Assess your company’s list of expenses
- Inspect the correlation between revenue and costs for the industry of your business
- Evaluate your marketplace and competition
- Compare your business to industry standards
- Concentrate on factors which have the largest impact on the success of your revenue
- Formulate and document your budget
- Develop procedures to compare the actual performance of your business to those planned
- Identify types of new management information which may help you make more informed decisions
Budgeting enables you to visualize the future of your business. Using a budget as a benchmark, you can more readily identify where actual performance differs from planned performance. This insight will lead you to adjust the actions of your organization accordingly.
Our professionals can help make your budget an irreplaceable tool to put you and your business on the road to success. If you would like to learn more about budgeting for your business, please call our office today to set up an appointment.