Budgets are critical for all businesses. Whether your company is new or established, large or small, product or service based, you need a budget to keep afloat. Essentially, budgets provide you with a roadmap for your business by setting the targets that the business strives to achieve.
Creating your budget also helps answer the question, “How much do we spend?” You must know how much you need to spend to grow, as well as identify the line where you begin spending too much. Aside from being your roadmap, budgets are typical requirements of many investors and board of directors.
While budgets are essential to your operation, they can be intimidating. Where do you start? How do you make a budget plan? What if the budget reveals bad news? If you’re having these thoughts, you’re not alone. These are common concerns that often (unfortunately) deter business owners from creating a formal budget. We’ve put together the fundamentals you need for creating your budget:
The Budget Process
The main goal of creating a budget is to set revenue projections, cost of goods sold, gross profit margin targets and operating expenses. Once you outline this information, you can use it to make informed strategic and financial decisions.
Setting Revenue Goals
The stage of your business impacts the best way to set your revenue goals. For an established business with an operating history, look at past performance to determine if you think you can grow into the future. For a new business, start by researching your target market to establish a baseline. When setting your revenue goals, keep in mind these key points:
Setting Variable Costs
Variable costs are those that move with revenue and are necessary to earn revenue, such as employee labor for a services company, raw materials for a company making a product, or the cost of goods sold for a retail company.
Setting Semi-Variable Costs
Semi-variable costs are those that can be variable with certain sales volume thresholds. Think employee salaries, advertising or marketing.
Setting Fixed Costs
Fixed costs are those that must be paid and generally do not fluctuate with sales volumes, such as rent, utilities and insurance.
Using A Budget
Once you’ve set your budget, the most important thing is to measure your actual performance against the budget on a regular basis. We recommend doing this monthly. Measuring your budget against performance is critical to understanding if you are meeting, failing to meet or exceeding expectations, as well as determining your next steps.
If the actual performance is not aligning with the budget, you’ll need to investigate each area to define where there are misalignments. After extensive analysis, you can determine if your budget is truly misaligned with the ability of the company to perform in the future.
You can, and should, make adjustments to your budget as necessary. Just like your business, budgets are not static. As things change in your organization, your budget may need to be updated to stay accurate. However, if you are making adjustments, ensure you have a reason. Don’t make adjustments simply because expenses were higher than expected or revenues were lower than expected.
Share important aspects of your budget with key stakeholders in your organization—this is critical to ensure everyone’s priorities and expectations are aligned. Be sure to communicate how your budget impacts different areas of your company so that everyone can do their part to work within the budget. Set incentives to encourage everyone to stick to the budget.
Bottom line, to ensure your company is on (and stays on) the right track, you simply have to create a budget. Once you have your budget plan, there are a variety of budgeting tools and apps you can use to stay on track. You can also use your budget plan as a framework for more advanced budgeting and fundraising solutions. Happy Budgeting!