Drafting your business budget has two key components:
- Gathering the information you need to write it
- Using it to control your finances
How to write your business budget
1. Use budget software
Many free online budget programs exist that are useful in learning the practice of establishing a business budget. Some are question-driven and allow for detailed input and then generate a useful spending plan. All amounts must be accurate for the plan to be meaningful against the actual business operation. Research will be required to find the information needed by the program.
2. Calculate operating expenses
There are basic percentages used to construct a budget when the business has no actual financial history to use for reference. Employee expenses, facility costs, and utility use can be estimated as a certain percentage of the overall budget based on the industry standard. Accountants will often compute these percentages and raise concern if any one of these major categories strays from the norm.
3. Refer to checking account statements
Bank statements are very useful tools for examining every purchase and expenditure. Budget amounts can be constructed from previous months and years of business. Create a spreadsheet that shows actual monthly expenditures and build a monthly budget. Annual budget amounts are only guidelines that must be broken down into month-by-month operating limits.
4. Estimate income
Nearly every business experiences seasonal lulls, so income should be estimated on a monthly basis. When income wanes in the same month that expenditures rise, some savings must exist for the company to continue to operate. Income estimates will place visual emphasis on the months that will require special consideration.
5. Evaluate equipment
During the budget exercise every year, all equipment must be evaluated for possible replacement. Vehicles, computer equipment, and all equipment used by employees are essential to revenue generation. Budget amounts for repair and replacement will reduce the risk of unanticipated capital expenditures. Any request for new equipment should be documented with prices and associated expense estimates.
6. Assess existing inventory
Companies have sales inventory, supply inventory, or office supplies that remain on the shelves throughout the year. When cash flow is consistent, too much inventory does not challenge the operation. Close evaluation of every type of inventory will reveal stagnant sales inventory that must be sold to redeem the cash. Supplies allowed to expire are a direct waste of money. Every inventory must be managed at the lowest possible level without impeding the operation.
Control business finances
Operating the business within budget can become a way of life if some simple guidelines are implemented soon after the budget is written.
7. Include employees in cost reduction efforts
Employees will participate when rewards are implemented for their creative contributions to reducing costs. If a business owner can spend $50 on a gift certificate for an idea that saves $1000, he would be wise to do so. All employees enjoy being recognized and included in the improvement of the workplace.
8. Consider selling unused assets
When the equipment review is performed, list all assets that are not utilized and consider selling them to another business. If a loan exists on the asset, selling the piece of equipment will also eliminate the monthly loan payment. Even selling a piece of heavy equipment for the scrap metal is better than having a hazard sitting on the property.
9. Combine employee roles
Employees who resign should not be immediately replaced unless the role is unique within the business and generates revenue. Create opportunity for existing employees by asking for internal applications to fill the role or combining the vacant role with another role. Reevaluate salary and compensation to retain the best employees and operate with fewer people.
10. Conduct monthly budget reviews
At some point within every 30-day period, conduct a formal budget review against the actual expenditures in the previous month. Look at the coming 90-day period and anticipate anywhere that expenses are going to overwhelm income in the same month. Make adjustments to cover any surprise expenditures and keep good notes for the next annual budget exercise.
Whether the business is just starting out or has been around for years, the basic budgeting process is the same. Just as the blueprint is the guide for building a house, the budget is a guide for financial decisions throughout the year. Creativity is important when addressing needs in lean times. Many business challenges can be addressed without spending money. As revenue increases, maintaining a budget is even more important to control expenditures and grow the business.