7 Tips to Build and Maintain Your Business Budget: Part 2

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If you have reviewed the first few important steps when it comes to creating and maintaining a business budget in our first article, then you are ready for some more steps in the process in Part 2 of 7 Tips to Build and Maintain Your Business Budget

Using a budget is a key component in driving your company’s financial future, but many businesses wonder: Where to start or how to make their current budget even better.  My last post <link> shared tips on where to start by knowing which financial numbers to monitor and track daily, weekly and monthly. How do you ensure that you’re making sound business decisions based on ROI and your sales cycle? The rest of these tips will ensure you’ve created a budget that is realistic and is prepared for the challenges and opportunities that lie ahead.

4. Overestimate expenses. By overestimating monthly expenses, businesses can account for the possibility of variable unexpected expenses. A suggestion: take your total expenses, then add at least 5% to cover the unexpected financial surprise.  Most businesses can categorize their expenses in three areas (see below).   By analyzing spending history, you can estimate your monthly expenses in each category.

  • Fixed expected expenses: Expenses that come at regular intervals (weekly, monthly, annually, etc.) and don’t vary are called “fixed.” Examples can include building rent, insurance premiums, equipment leases and payroll.
  • Variable expected expenses: Expenses that come at regular intervals but can vary are called “variable.” Examples can include utilities, phone bills, employee training, bonuses, donations.
  • Variable unexpected expenses: Otherwise known as “emergency expenses,” this category is the most likely to trip up even the best budget plans. For example, no one plans for a major piece of equipment to fail or their biggest client to jump ship.

5. Plan for an emergency fund. In business, rainy day funds or retained earnings are cash supplies that are kept on hand to enable your business to continue operating in lean times or in an emergency. These funds allow your business to keep providing services while making payroll, paying bills, and purchasing supplies, and they allow the Owner to sustain the family’s income. The emergency fund provides immediate access to funds during critical times.  Insurance may cover loss, property damage and other repairs, but processing claims can take weeks or months, putting a sledgehammer through your profitability and productivity. Budgeting for the emergency fund while keep you afloat.

6. Use Your Budget.  By Making and following a budget, you can better control costs, avoid overspending, and plan to meet financial goals.

It is important that you compare actual results vs. the budget and investigate any significant differences and the causes.

Failure to properly use your budget can seriously impact your bottom line, and even jeopardize the success of your business. Tracking your expenses is one of the key factors in making your budget work for you. Over time your budget will allow you to track revenue, expenses, and cash flow, cut unnecessary spending, allocate revenue to other areas of the business, prepare for busy seasons and slowdowns, plan for required purchases, gauge the positive impact of budget changes, and secure funding from financial institutions.

7. Seek professional advice and guidance. Building a realistic budget is an effective way to help keep your business profitable.  It might be difficult at first but creating a good budget and tracking the actual results against the budget will help your business stay healthy and successful in the long run. 

If you need help building your company’s budget or want to ensure you’ve built a budget that fits your goals and your unique situation, contact AETucker Consulting for help.

As a CFO consultant, I help owners, management and board members solve financial and operational challenges by providing unique and customized guidance.

To learn more about how I can help your business, please contact Andrew@aetuckerconsulting.com www.aetuckerconsulting.com

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7 Tips to Build and Maintain Your Business Budget: Part 1

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This is the time of year when many companies dedicate time and energy devoted to their Annual Budget.  

So, exactly what is a Budget?  A budget is an estimate of income and expenditure for a set period of time.  In other words, it is your plan for how you think the business will perform over the chosen period of time, typically a year.

Budgeting should be the central nervous system of your business. A well-planned and executed budget can help ensure your business is ready to take on new opportunities and has financial safeguards in place should unwanted surprises strike.

Starting the budgeting process can feel overwhelming. Many clients come to me with the same concerns: where do I start and how do I stick to a budget?  

Following these steps will ensure operational wellness:

  1. Know your current numbers. It’s important to keep a close eye on the critical numbers that can help you predict a lag or success of your business. These key numbers include:
  • Cash Flow
  • Profit and Loss
  • Sales
  • Price/Selling Point(s)
  • Gross Margin
  • Net income
  • Total Inventory

    2. Focus on Return on Investment (ROI).  Business owners can use return on investment as a measuring stick for their company’s profitability. The amount of money spent vs. the expected financial return should be a focus of performance management. The data helps measure success over time and takes the guesswork out of making future business decisions.

Simply divide the gains from your investment by your investment’s cost and you have your answer as a percentage or ratio. From hiring a new employee to investing in a new software tool to expanding your advertising, ROI determines whether your efforts are yielding results and how can you properly optimize profitability.

3. Track the sales cycle: There are a number of factors to consider:

  1. How many days does it take for prospects to move through your pipeline? The answer depends on how many steps are in your sales cycle, how complex your product is, and the cost of your offering.
  2. What are the projected sales for the budget period? If you overestimate, it will cause you problems in the future.
  3. What are the direct costs of sales (i.e. costs of materials, components or subcontractors to make the product/provide the service)?
  4. What are the fixed costs?
  5. What are the overhead costs? 

The length of time it takes to convert leads to sales needs to be factored into your budget. Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months and beyond. This will enable you to analyze your margins and other key ratios such as your return on investment.

Stay tuned, my next post will share the rest of these budgeting tips to keep your business healthy and on track.  

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