Good budgeting is essential in keeping your business finances on track and managing financial performance.
In today’s edition of Tips from the Experts, we asked seasoned business professionals to give us their top tips on how to budget effectively.
Creating a budget: key steps
Steph Rickaby, Director at Sunflower Accounts
Before you embark on setting a budget, you should invest significant time in developing a business plan – have a clear financial picture of where you currently stand and where you want to be over the coming year. This will set you in good stead for creating an effective budget.
Rather than making forecasts or predictions, a successful budget plan should contain controlled, expected and well planned outcomes for the future as defined by your business plan – thus ensuring that you are able to fund both your current commitments and any future plans.
1. What are predicted sales?
This can be based on historic information on current customers and also expected sales, linking in with your marketing plan. Ensure your predictions are realistic though, as overestimating in your budget will result in the misallocation of resources.
2. What are direct costs?
These are the costs directly attributable to making the product or supplying the service. For this, it helps to know the actual unit cost or percentage of material costs.
3. What are fixed costs or overheads?
Break it down into sub-categories, e.g. staff, premises, utilities, vehicle expenses, equipment, advertising and marketing, travel and subsistence, accountancy, legal, stationery and postage – to name a few.
4. Do you predict a profit in a budget?
Following the steps above will leave you with a draft income and expenditure account, from which you can determine if you have a predicted profit. At this stage you can review the costs and, if necessary, look at ways to reduce them and streamline the business in line with your business plan.
5. Do the actual figures match the budget?
Finally, now that you have completed your budget, it is important to remember that this should be used as a working document and not put in a drawer or filed away. You should regularly review actual figures against the budget and revise if necessary.
Paul Williams from Jelf
1. Set the budget.
The first step is to set yourself up for success. Use a budgeting method or tool that is familiar to you and easy to understand. If you need some help, don’t be afraid to ask a professional.
2. Err on the side of caution.
Keep a healthy pessimism on your income; don’t overestimate. The same applies to your expenses – don’t assume you can pay less, and be aware of the likelihood of unexpected costs.
3. Review regularly (at least once a month).
This helps you to stay aware of what is and isn’t working. If the estimates you set prove to be a little off the mark, you can adjust them and alter the budget accordingly.
4. Be strict on spend.
Don’t feel that the highest price is always better. Remember: if you don’t spend it, you don’t have to earn it.
5. Spread the cost.
Many goods and services (business insurance is just one example) can be paid in instalments, helping your cash flow throughout the year.
Key factors to consider when creating a budget
Tim Johnson, Founding Partner of bothAND LLP
1. Don’t scrimp on marketing and lead generation.
However good your business is, it will always need to bring on new customers to be able to grow and stay in the game. Knowing your cost per acquisition (CPA), cost of each new customer and the lifetime value of your average client (LTV) allows you to work out what sustainable marketing expenditure should be budgeted for. Carrying out this groundwork will also allow you to test and measure the effectiveness of your different marketing approaches.
2. Invest in process and team development.
Whilst it is important to invest in sales and marketing, that money will be wasted if potential new clients check out your reviews online and find that existing clients are less than thrilled with their experiences of working with you. Customer experience is becoming increasingly important as the prime differentiator in a crowded and competitive market. This means that it is essential to budget for consistent and incremental process improvement, and involve your team whilst doing so.
3. Budget to make a profit.
Contrary to popular belief, a business’ sole purpose isn’t to provide a return on investment to its shareholders. The business needs to create a sustainable profit in order to effectively engage its stakeholders and ensure they get long term value from their investment. Consequently it is important to take profit into account when developing the budget.
4. Budget for innovation.
We live in fast moving times, where it is essential to be aware of market changes and to spot new niches or new collaborative projects or products. Businesses who spend time and money on innovation will reap the benefits.
5. Don’t let the accountant take charge!
Budgeting often lands in the finance department’s hands, for obvious reasons, as they are the custodians of the coffers. But that doesn’t mean that they are necessarily the best decision makers when it comes to budgeting for the future development of the business. It is tempting for the finance department to see the immediate benefit to the bottom line of short term cost savings – however, cutting costs could affect the business’ ability to improve innovation and customer satisfaction.
Budget tips for start-ups
Tom Bourlet, Digital Marketing Manager for SNCDirect
1. Account for making a loss in the first year.
If you are planning to start a business, work out if you can afford to make a loss in the first financial year, as this is often the case. If you don’t have the capital to manage this loss, then your company may fail before it has even started.
2. Never underestimate the initial budget required.
It is best to allocate funds to all aspects of your business – everything from web design to legal procedures, as this can put a strain on your business if you aren’t prepared.
3. Don’t try to handle the accounting yourself
Unless you are particularly strong or experienced in this area, it is a good idea to hire external accounting support to ensure you are handling your finances and taxes correctly, and to make sure your books balance perfectly.
4. Expect the unexpected.
It is recommended that you budget for unexpected costs each month, so that when the need arises you are prepared to handle the costs without it having a knock on effect on other areas of the business. If there are no unexpected costs, then the money can be brought forward for the next month or be re-invested into the business.
5. Keep up to date.
Create a Gantt chart at the beginning of the year and consistently update it, to include when money will be going in and out. This will help you to work out if any costs are overlapping and becoming unaffordable.
Budget tips for SMEs
Charlotte Semler, Founder of Charlotte & Co
1. Itemise your budget.
It’s better to build your budget with all the cost and revenue lines individually itemised. This allows you to see exactly where the money is coming from and going to, and makes it simple to check the budget at a glance as the year progresses.
2. Don’t budget based on guesses.
Use your budget date as a deadline to get final quotes from suppliers for all the future year’s projects.
3. Don’t pad every post as an insurance against surprises.
Instead, have a separate line that is clearly for contingency. That way you can easily see which lines are above and below budget as the year unfolds.
4. Do run sensitivity tests.
What will happen to the bottom line and cash flow if revenues drop 5% or 10% below your forecast? And what costs will you cut if that happens?
5. Double check!
Make sure more than one senior person checks all the details as mistakes do occur. It is better to be safe than sorry.
Tips on reducing costs
Mark Krassner, President, Knee Walker Central
1. Learn from history
When setting a budget for your company, it’s essential to quantify trends from the previous year. Look for seasonal expenses or particular months where cash flow looks more promising. Also, look for areas of your business where you need to invest to ensure you aren’t overwhelmed at a statistically busy time. The best way to make these predictions is to get as much data as possible from your last 12 months in business and also calculate the rate of growth your company is experiencing.
2. Reduce admin expenses
In an age where everything is digital, maybe it’s time to evaluate the need for a printer, excess paper and paper-related products. Also keep your travelling under control; travel expenses can sneak up on you and take a huge and unexpected bite out of your budget. Other administrative items that can usually be cut out of any business budget include: telephone plans, company lunches, expense accounts, and so on. As a matter of fact, if an administrative item isn’t vital to the everyday operation of your business, it should be scrutinized closely, as it might be able to be cut altogether without any significant loss to your business.
3. Reduce technology
While technology has quickly made owning and operating a business more exciting and easier than ever, there are lots of expenses wrapped up in business-related technology. For instance, if your small business only has two employees and a small number of clients, you probably don’t need the latest and greatest smartphone. And unless your business is a juggernaut that is handling international calls every day, you probably don’t need that over-the-top phone system. The same is true of fancy coffee makers, smart televisions and super-ultra-high-def computer monitors.
Free tools like Skype and Outlook are often all the technology a business needs to get by unless a certain sort of technology is an integral part of your business (IT businesses, for instance).
4. Be a savvy shopper
Many business owners do a decent job of finding the best deals when they just start out. But then a year passes and even when budgets are set annually or monthly, they never take the time to see if any better deals have surfaced. Whether it’s something your business needs to run smoothly or an inexpensive office item, it never hurts to be a savvy shopper. This is the definitive illustration of “a penny saved is a penny earned.”
5. Assume the worst
You’ll find pretty quickly that predicting an accurate budget is next to impossible. So don’t let it bother you too badly if you can’t get it right. One way to get around the turmoil of going over a predicted budget is to always assume the worst—meaning that you might want to make a habit of over-estimating.
For example, if you think next week’s travel budget will land somewhere between $550-$600, go ahead and budget for $655. By assuming the worst in your budget, you will learn to become more thrifty when it comes to shopping and, from time to time, you might even find that you’ve exceeded your predictions.
Thanks to all our contributors for their valuable advice.
Do you have any top budgeting tips for businesses? Feel free to leave a comment in the section below.