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.