The benefits of budgeting in business

You’ve got a great business idea, so it’s only natural that you want to hit the ground running. But without a budget, it’s all too easy to get blown off course. Here’s what to know about budgeting and forecasting in business, including some easy tips to get started.

What is a budget?

A budget serves as the roadmap to accompany your business plan. It’s a working document outlining start-up capital, expected revenue, and expenditure. By consulting the budget, businesses can avoid spending more than they have and falling into debt. This type of financial plan should:

• Help control a business’s finances

• Ensure the business can fund its commitments

• Help business owners meet objectives

• Help business owners fund future projects

While budgeting and forecasting often go hand in hand, the fundamental difference is that a forecast is used to predict the future, while a budget is used to plan the future.

Types of budgets

While we’ve given a general definition of a budget above, it’s important to keep in mind that there are several types of budgets to use depending on your timeline and project.

• Master budget: This covers budgeting and forecasting for the full fiscal year, with projections for the income statement, cash flow statement, and balance sheet.

• Static budget: This type of budgeting tool uses numbers based on a company’s planned inputs and outputs. In other words, it looks at fixed expenses like rent or grant payments.

• Operating budget: The operating budget includes all revenue and expenses generated from a business’s daily operations. It focuses on revenue and cost of goods sold, but doesn’t include long-term debt.

• Cash flow budget: This type of budget factors in all cash inflows and outflows to help a business make sure it can cover its expenses using generated cash.

The benefits of budgeting

There are numerous benefits of budgeting. Without a budget, it’s all too easy to underestimate your expenses and diminish cash flow. Here are a few of the primary benefits to consider:

• Provide targets for growth

• Improved focus based on facts

• Manage cash flow more efficiently

• Monitor performance and progress

• Allocate resources more appropriately

• Troubleshoot financing problems

In short, use budgeting tools to avoid mistakes that could be prevented with a bit of advance planning.

Understanding the budgeting process

The budgeting process goes beyond budget creation. To make the most of budgeting benefits, it’s best to view it as a work in progress, monitoring results and making edits as necessary. Here are a few general steps to follow as you create, monitor, and manage your business budget.

• Step 1: Identify objectives and the type of budget needed. Are you looking at a short-term budget to achieve a specific goal? Is this a long-term budget for your business’s five-year plan?

• Step 2: Identify your projected sales, direct costs of sales, and fixed costs or overheads. Overhead costs can be broken down by type, including the costs of employee wages, premises rental, associated taxes, utilities, marketing costs, and more. Don’t forget to factor in routine maintenance for your equipment as well as the ongoing cost of insurance and legal fees. Cast a wide net when creating your budget to include all relevant overhead costs.

• Step 3: Estimate your projected revenues, using historic sales figures and cash flows as a guide. You should also consider changes to the industry and competition, as well as your upcoming sales and marketing plans.

• Step 4: Try to stick to your budget closely. It might help to use a rolling budget which is continually updated for the upcoming year.

Budgeting tips for success

While the basics of budgeting are straightforward, there are a few ways you can make the process run more smoothly. Try our budgeting tips for greater efficiency.

1. Ask for help. Your business likely includes numerous professionals with financial responsibilities, including those in the sales and marketing departments. Ask for their help when estimating sales figures, production costs, and marketing expectations. This will keep your budget grounded.

2. Contact suppliers for quotes. If you base your projected expenditures off last year’s figures, you might find that there’s a gap between expectation and reality. Be sure to contact suppliers directly to work any changes in pricing into the new budget.

3. Use your budget for benchmarking. Your budget offers a convenient way to compare performance from one year to the next. You’ll see costs, revenues, and cash flows at a glance while being able to compare projected figures with outcomes.

4. Focus on a handful of KPIs. It’s tempting to work a multitude of key performance indicators into the budget, but it’s best to focus on a smaller amount. Choose drivers like working capital and net profit to highlight problems early and adjust the budget as needed.

Finally, don’t forget to review your budget on a consistent basis for best results. Check in every week or month to compare actual income to projected income, analysing reasons for any discrepancy between the two.

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