As we near the end of the financial year and begin closing out 2013’s books, it’s important to start thinking about next year’s financial situation. For small businesses in particular, reviewing this year’s financial situation and projecting next year’s is crucial to success; however, many businesses enter the new year grasping last year’s budget hoping it will be enough to get them through the year successfully. Instead of planning for the new challenges and situations ahead, they rely on what “worked” for them in the past.
This is a recipe for failure.
Effective budgeting requires planning, often yearly and monthly. If you are not looking ahead and actively anticipating costs, then your budget is not preparing you for success. Here are a few crucial tips to help you develop an effective budget so your business can succeed in 2014 and beyond:
- Take the timing of payments and expenses into account.
Many small business owners make the mistake of averaging yearly incomes and expenses and allocating that amount for every month in the year. While this may seem like a good practice in theory, reality is that your business is probably not be bringing in the specified amount of income every month. You need to take into account the timing of your payments and bills. If you make the majority of your money during peak seasons, make sure that your budget reflects this. If some of your expenses are only annually or quarterly, your budget will need to reflect that as well. Dividing the sum over 12 months is not a realistic – or effective – budget, and it can lead to some serious cash flow errors. Effective budgeting involves projecting each month’s income and expenses so you have a better idea of what you are facing every month. - Review last year’s numbers.
Before you start planning for next year’s budget, you need to thoroughly evaluate this last year’s budget. Make sure that your employees and business partners have taken a look at last year’s capital and rate of returns, as well as your business’ expenses. Brainstorm ways to cut costs in the coming year and anticipate changes, such as the need to purchase new software or hire additional employees. - Run periodic budget comparison reports.
An important part of effective budgeting involves comparing your budget to your business’ actuals. We suggest performing a monthly, quarterly and yearly budget comparison in which you compare your budget with the actual amounts earned and expenses incurred in the specified time frame. This will help you determine the changes you need to grow your business, as well as provide you with some insight into your business’ current financial situation. If you are not running periodic budget comparison reports, your budget is ineffective. Don’t let your budget be something you look at once at the beginning of the year; make sure that it plays an active role in your business and business decisions. - Reevaluate your technology purchasing plans.
Investing in new technology is usually a good idea. New technology solutions, such as Peachtree, Sage software or Microsoft Dynamics, often save small businesses a significant amount of money and time, as well as help them improve efficiency and employee productivity. Investing in too much technology, however, can be detrimental to your business. Before you invest in yet another technology, take a look at your budget. An effective budget will give you a realistic picture of your company’s financial situation and help you determine if that purchase is a “smart” investment.If, in fact, you do have room in your budget to justify the purchase, make sure that you have thought through the alternatives before you add the technology purchase to your budget. Is there a cheaper alternative? Is there a more affordable way to accomplish the same task? How have you been able to get along without the technology this far? Is it really necessary? Answering these questions will help you determine whether or not your company should make the investment.
Effective budgeting requires extensive planning and realistic oversight. If your budget is not realistic, it is not going to do your company any good. For more effective budgeting tips, stay tuned to our blog.