Budgeting…. No wonder the government is trillions in debt and 61 percent of American adults don’t keep a budget. However, those who do keep a budget have the power to build their own financial futures. Being burdened by debt or a failing company sucks even more than budgeting. By breaking down your assets and liabilities and understanding the what, why, and how of creating a budget, you can gain control of your business and feel a new level of empowerment, not to mention a tangible boost in your company’s bottom line. This article will outline not only the why, but the what and the how of increasing your company’s revenue by applying simple budgeting tactics.
What is budgeting?
Budgeting for your business means taking a hard look at your financial inputs and outputs in order to decide how you will allocate funds. By systematically predetermining how your company will spend, you can prepare for the future and help your company stay in economic shape, avoiding overspend and hitting revenue targets.
Looking to the future, you can estimate profits and plan how you will spend that estimated revenue. This budget should both outline and determine every business expenditure you make. There are three components to every business budget:
- Revenue: how much total money your business brings in from all sources. A budget involves predicting future revenue.
- Total costs/expenses: All the money you spend to run your business and generate revenue. There are three parts to costs and expenses:
- Fixed costs: monthly costs that do not change amount (ex. rent)
- Variable costs: costs that change from time to time or by season, these are less predictable (ex. materials to make your product)
- Semi-variable costs: costs that may be constant for some time but fluctuate depending on changes in the company. (ex. salaries)
- Profits: Profits=Revenue-Costs. Plan your budget so that costs are always less than revenue in order to turn a profit.
Three major types of budgets exist in business:
- Whole-business budget: This type of budget includes all aspects of a company, even if they are divided into different self-sufficient divisions. A whole-business budget helps you analyze the profit potential of the entire company.
- Enterprise Budget: With this type of budget, business owners or financial planners can identify revenue and expenses segmented by each division. This type of budget is used to decide where to allot funds based on the divisions within a company.
- Partial Budget: The futurist of budgeting, partial budgeting means applying different variables to your current budget and projecting the outcome of these changes. Partial budgets allow business owners to predict for the future of their companies.
Why do I need to budget?
Benjamin Franklin famously taught, “When you fail to plan, you plan to fail.” When businesses fail to plan a budget, they plan to fail financially. On average, companies who don’t budget spend 25 percent more each year than companies of the same size who do budget.
Budgeting is the starting block for business success. It lays the groundwork for success in the future by showing business owners and financial planners the facts and figures that will total their success. Budgeting allows business owners to think ahead and set meaningful and strategic goals based on their previous progress. Budgeting allows business owners to more correctly project profit and set growth goals. So why aren’t you budgeting? Whatever stage you start at, it informs intelligent actions. If you’re a startup, budgeting allows you to calculate runway to profitability. If you’re a small business, it helps determine at what rate you should scale. At mid and enterprise level, it helps leadership and finance set and hit goals to target and minimize waste within the organization.
By setting a budget, you can prepare for upcoming expenses and get ahead of the competition and the coming financial burdens you will face. Let’s say your small business makes a profit of $500,000 each year. However, after paying your employees, yourself, and settling your expenses, you see that the next year’s costs will total $525,000. By forecasting this, you can plan how you will generate extra revenue or make cuts in order to stay solvent and in the black.
After you model the funds you will need to run your business, you can plan specific goals to reach that model. These can be more short-term and specific objectives that will help you plan how to reach a larger business model. By planning out these smaller objectives you can also foresee other needs. For example, let’s say your work has been slowed over the past year due to old technology in your office. By setting a budget, you can plan when within the next year replacing old technology will be feasible for your business.
Budgeting will help you hold yourself and your employees responsible for spending choices. By setting goals and following up on them, you will be more able to measure progress. “When performance is measured and reported, the rate of improvement accelerates.” Create living, measurable, attainable, and timely budget targets. Write them down and refer to them regularly. Set a time frame for which you will Watch for red flags, which include significant variations fromt the course you have set, and course correct if necessary.
How can businesses budget wisely?
- Use an online template: Good news! We made some for you at the bottom of this page! A template will detail all the different aspects of your business that you should account for. By filling in the spaces with your estimates, you have started a budget! If you have difficulties, contact your accountant.
- Decide profit margin: Remember, Profit=Revenue-Expenses. So, if your business makes $100 in a year, and costs $90 to run, you made a profit of $10. This is a 10 percent profit margin. Talk to a financial advisor or research online typical profit margins for your line of business. From how much money you expect to make, determine your profit margin and plan a budget that allows you to meet that profit margin.
- Determine costs: Include in your budget all the costs incurred by your business and detail these costs on your budget template. Use data from previous years to determine fixed costs. Then, estimate your variable costs based on how much of your product or service you plan to sell or provide. Finally, determine semi-variable costs based on how much you spend on fixed costs, but could change based on circumstances (ex. your employees working hours, how much time you spend on the telephone and the cost of your plan, etc.)
Budgeting doesn’t have to be the bane of business existence. We’ve created these easy tools in order to provide simple ways to start budgeting for your business today. By determining your inputs and outputs, setting profit margin goals, and using a system (like the template found here!), you can increase profitability and take control of spending at your business.
Divvy is the world’s first fully-automated expense management platform. What are you waiting for? Give Divvy a try.