Category: Small Business

Improve Efficiency by Creating an Effective Budget

Improving your small business’ efficiency involves more than simply changing a few processes and procedures; it involves knowing the ins and outs of your company and being able to account for every dollar that passes through your business. While budgeting may not be the first thing that comes to mind when you think about ways to improve your company’s efficiency, an effective budget can save you a substantial amount time and money, allowing you to focus on the areas of your business that need further improvement.

Most small businesses already have budgets in place; however, many companies are failing to take full advantage of the budgeting process. An effective budget is a life-saver for the small business, especially in uncertain financial times. An effective budget will gauge the health of your business, help you plan for future expenses and needs (such as the hiring of a new employee, new hardware or a new office space), and provide you with the necessary tools to help your company grow.

Consider the following basic budgeting tips below to learn how to transform your budget and improve the overall efficiency of your business:

1. Keep Your Accounting Records Updated

Think of your accounting system as the answer to all of your problems? Want to find out how your company faired last year? Pull a report. Need to know the amount of money you are spending on that new project? Pull a report. Do you need access to this year’s projections in order to plan out the year effectively? Pull a report.

Your accounting system contains a wealth of information designed to help you run your business smoothly and efficiently. Start by running historical reports that will show you the breakdown of your monthly and yearly costs. Use these reports to compare this year to last and get an idea of where your business is spending its money.

Make sure that you pull a break down report every month and any other necessary accounting data you may need for forecasting. This will help you gain a better idea of where your business is  financially, not only month-to-month, but year-to-year.

2. Set Business Goals and Develop Realistic Strategies for Reaching These Goals

The purpose of a budget is two-fold: to gauge the financial health of a business and to help that business accomplish its goals (financial and otherwise). What are your future business goals? Prior to creating your budget, sit down with key members of your staff and discuss your company’s future. Ask yourself these questions to get a start on developing your goals: What are your sales goals for the year? What costs can be eliminated and what costs are crucial to meeting those goals? What will our marketing strategies look like each month? What is our profitability goal for the upcoming year? How can we realistically meet that goal?

In order to reach the goals your company set forth, you will need to develop realistic and quantifiable strategies. These are realistic goals that can be measured. Instead of saying “I want to increase sales this year”, set a more realistic goal, such as increasing sales by 5% in the first quarter of the year. This will help you not only create more realistic – therefore, attainable – goals, but it will also help you plan more effectively.

3. Incorporate Your Goals into Your Forecasts

Now that you have defined your goals, incorporate them into your new monthly forecast. These forecasts are based on past accounting data and future goals. Remember to adjust your initial forecast based on any irregularities of the past year. For example, if you had a slow June last year, consider revising your baseline to account for June’s irregularity.

4. Compare Your Actual Results to Your Projections Each Month

Once you have created a new forecast for each month of the year, develop a template that allows you to track the actual numbers as compared to those forecasted. Calculate the difference and percentage of variance between what you forecasted and the actual numbers for that month. This will give you a better understanding of your company’s performance, and will help you create more realistic forecasts for the months to come.

Make sure that you review your actual totals vs. your future forecasted totals each month in order to stay on track to meet your initial goals. This will allow you to make immediate and necessary adjustments in order to reach your goals.

5. Identify and Re-evaluate Cost Areas in Your Budget

After you have evaluated your company’s current financial standings and projections, you need to sit down and review the cost areas as compared to the total costs being spent. Are there areas that could use improvement? Are there cost areas that could be eliminated? Ask yourself these questions as you evaluate every area of your budget. Eliminate any unnecessary costs and adjust spending according to your budgeting goals.

As you review your various costs, re-evaluate your suppliers and service providers to ensure that you are getting the best deal possible. Ask around, and get an idea of the average price for that service.  If you feel that you are being taken advantage of, look elsewhere.

For more information about creating an initial budget, read our article, “5 Tips for Effective Budgeting”.

Effective Budgeting for the Small Business

There are surprisingly few small businesses that develop and maintain yearly budgets. Regardless of their reasons – whether they feel it takes too much effort to learn how to develop a budget or too much time during the week to maintain it – small business owners have been cautious when it comes to creating budgets for their businesses. And their businesses are suffering as a result. In fact, recent surveys show that a good number of businesses that have failed within the last year failed because of poor financial management.

An effective budget can give companies a clear perspective and enable them to make smart decisions in regard to their finances.  Without a budget to guide them, many companies do not know the state of their finances and end up making costly financial decisions. By creating an effective budget, companies can ensure that their finances are being managed properly, guaranteeing their spot in the economic future.

Creating an effective budget does not have to be hard. Consider the following tips to help you get started on creating an effective budget for your company:

  • Spend some time developing your budget. While it should not take an exorbitant amount of time, creating an effective budget will take some time and thought. It should not be something you throw together in an afternoon; it should be the result of coordinated input and effort by you and your team. The future of your company is valuable, so invest the time and do it right.
  •  Practice makes perfect. While it may seem challenging to forecast your business’ future, it will get easier over time. Don’t get discouraged if you do not get it right the first time. The more you forecast and stick to your budget, the more accurate your forecasts will be.
  • Allow for some flex. Accounting for every penny that goes in and out of your company is not the objective. A budget is designed to give your company some direction, not an ultimatum. When developing your budget, make sure that you account for some unexpected costs (such as service repairs, unexpected fees, etc.) and allow some room for error. Remember that the budget is just a guide to help you manage your finances better and prepare for the immediate financial future.
  • Make an estimation on your income and expenses. An effective budget takes your income and expenses into account during a specific timeframe. Your income should include: gross sales, any interests accrued, accounts receivable, and any other income sources. Your expenses consist of any monetary resources that leave your company (such as accounts payable, payroll, material costs, utilities, and real estate costs).
  • Create cash flow and profit targets. Every budget needs both cash flow and profit targets. The two bottom lines are very different and require different kinds of attention to control them. Make sure you understand the difference between the two and create your budget accordingly.
  • Compare budgets at the end of every month.This will give your company a good understanding of your finances and where to go from there. Compare your actual results to your forecasts and ask yourself the following questions:
    • How are we doing compared to the budget? Why do our results differ from our plan?
    • What can we do NOW to ensure that we have a better result next month?
    • What are we learning that will make next year’s budget more effective?
    • Was there anything that was unaccounted for last month that we can include in next month’s budget?

Regardless of how you set it up, your budget will help your company achieve its goals and ensure success for the future. While it can be challenging to develop and maintain a budget (especially for small businesses), it is worth it. Learn more about effective budgeting strategies here.