For most entrepreneurs, budgeting is not top of mind. It’s either a chore or an afterthought.
Chances are, you didn’t go to business school, where they learn how to construct fancy pivot tables and work out budgets and financial projections.
Bearing this in mind, it’s natural to feel out of your depth when it comes to budgeting for your business. However, budgeting is just one of those tricky things that you have to work out — you can’t ignore it.
The good news? You don’t need to have a business degree, or to be amazing with numbers in order to learn how to budget for a business. In this article, we walk you through a simple step-by-step process that you can use to create a budget for your business.
The importance of budgeting for a business
If you feel like budgeting isn’t crucial to your business, you’re not alone. In our experience, most business owners think that budgeting is an unnecessary step. They’re either of the opinions that market demand is too hard to predict (and hence it’s pointless to create a budget), or they feel like they’ve got everything worked out in their head and that they don’t need to put the numbers down on paper.
That said, getting your budgeting right is both pivotal and necessary; this is what allows you to lay the proper foundation for your company. First and foremost, when you’ve got your budget constructed properly, this gives you a great framework that you can use to set the Key Performance Indicators (KPIs) for both your company and your employees. On top of that, once you have your budget in place, you have a benchmark that you can use to measure your performance and determine whether the business is going well.
Finally, having a budget can also help you feel more comfortable with spending and investing money. Without a proper budget, you might either be more conservative with your money or spend more than you should — simply because you’re not sure where you stand. Once you’ve got a budget to work with, you’ll know exactly how much cash and reserves you have, and this will increase your confidence in your ability to invest and/or spend your money in other ways.
Of course, different companies will utilize and benefit from their budgets in different ways. If you’re in the eCommerce industry, cash flow will definitely be your priority; without sufficient cash on hand, you won’t be able to order inventory. For those running SaaS companies, budgeting for your customer acquisition costs and churn are key. Finally, if you’re running a consulting firm, your goal might be to figure out how to optimize your billable rates and lower your overhead costs.
Who should create the budget for a business?
If your company is still small (we’re talking no more than a handful of employees), then it’s up to you to set a budget for your business. Don’t worry, this isn’t a tough or complicated process — we’ve outlined a step-by-step guide that you can follow below.
If your company is larger than that, then you should get your CFO and finance team to take on the task of budgeting. Of course, you’ll still have to work with your team, especially when it comes to goal-setting, but you can let them take charge and lead the process. If you don’t have a CFO on your payroll, consider outsourcing your budget set to a virtual CFO!
How to budget for business: 5 simple steps
New to the world of budgeting? Here’s a simple 5-step guide that will teach you how to budget for a business.
Step 1: Set your goals and targets
The first step of the process is to identify your business goals and targets. Here are a few questions that you can use as prompts: How much revenue do you want to generate in the next year? How many customers do you want to have? How much profit do you want to generate?
Once you’ve come up with your goals and targets, identify the KPIs that correlate to each goal. If your goal is to increase your revenue by X% or grow your revenue to $XYZ, for example, relevant KPIs include Monthly Sales Growth, Average Profit Margin, and Average Order Value.
Step 2: Set up your sales and revenue forecast
Revenue forecasts sound complicated, but at their essence, they’re simply forecasts of how your revenue is built up over your different client groups, products or channels.
How do you estimate how much revenue you’ll earn in the coming year? Simple — look at historical trends, and take into account any factors that might influence your growth in the future. Think product launches and market expansion, current market trends, and your upcoming marketing and sales campaigns.
Step 3: Plan your Costs
Revenue aside, you’ll also need to forecast your costs to have a more complete view of how your business might perform in the upcoming year. Make sure you take into account your Cost of Sales as well as Selling, General and Administrative Expenses (SG&A) costs.
This is where most entrepreneurs are too optimistic, so challenge yourself to be more realistic — what costs will you incur, and how many employees do you need to reach your target? Can you really score that number of new clients with that marketing and sales spend?
Keep your eye open for miscellaneous fees that entrepreneurs tend to overlook as well, including banking fees, business licenses costs, professional fees, and bad receivables which you may end up writing off.
Step 4: Evaluate and adjust
Now that your budget is complete, it’s time to review and discuss it with the rest of your team. In this step, ensure that your plans are consistent and realistic, and ask key members of your team for their feedback and input as well.
Be sure to consider the perspectives of all departments, including marketing, sales and operations. You might have to tweak your budget several times before everyone’s satisfied and accepts ownership of their part.
Check if your plans make sense. Include all the key metrics in your calculation. Check if they make weird, sudden moves, and if they are realistic to achieve. For example – if your customer service team can handle 500 customers per agent, check in your forecast what the number of customers per agent works out to be. These kinds of checks give you a simple indication if you are on the right track.
Step 5: Conduct monthly reviews
Once you enter the new year, review your budget on a monthly basis, and identify the gaps between your budget and your actual numbers. If you find that you’re off by a significant amount, identify the root causes of the problem, and take corrective action.
After all, the only way to make a more accurate budget next time is to learn from your mistakes this year.
A final word on how to budget for a business
Now that you’ve reached the end of this guide, you’re fully equipped with the knowledge you need to create a budget for your business. The year is drawing to a close pretty soon, so you’ll want to work on your budget for the next year, ASAP!
If you don’t have a CFO on your team and don’t have the capacity to create a budget for your business, consider hiring a Virtual CFO. Here at ABEL, we can provide you with an experienced CFO who can help you work out your numbers, and set your company on the path to success!SCHEDULE A FREE CONSULTATION