It’s easy to think of a business budget as a statement of what you expect to spend and earn. In reality, it should be more of a planning tool. This will allow you to define your key actions, and form part of a step-plan to achieve them.
Any budget involves guesswork. The danger is that, often, in their enthusiasm for a project, owners don’t make sure such guesses are calculated. These should be based on as much sound information as can be gained and assessed.
Paint a picture of an achievable future. It’s easy to be too bullish. You can’t overcome problems by assuming they will disappear, yet some owners do. Equally, especially in tougher financial times, it can be comforting to draw your horns in too far. So, a budget is also about striking a balance.
A budget description should also show how to use the revenue you earn to achieve your business objectives. Some owners simply feel that revenue is their goal. Yet, unless you know how best to use it, your business is unlikely to grow as you would wish.
This is where research is of vital importance. Consider past budgets (if applicable) as a model. Assessing how the reality compares to the plan is a great starting point. You can see if there is a pattern of over-enthusiasm in some areas, under-estimation in others. Compare forecasts to the actual numbers. Question the expenses spent. You can then reassess and learn lessons. Using these, you can make more measured decisions in key areas for the period ahead.
A second area of research is in planning new projects or activities. These might be capital expense-based, such as upgrading facilities. They could be revenue-based in financing increased promotional activities. Here’s a truth: appreciate that things usually cost more than you imagine. For example, do you ever hear of a government project coming in under budget?
This brings us to cash flow management. It isn’t enough to know how much you are likely to earn. It’s vital to understand when these funds will be available. Build a picture of how your customers will pay. Some will be swifter than others, so it’s vital to plot cash flow. This is particularly true if much of your revenue will come from a relatively small number of major clients.
If it is likely that you will encounter some period where this could be a problem, it pays to give your bank an early heads-up. This is always better than having to ask for emergency funding, which often suggests a lack of clear planning.
The previous point is also true when approaching your bank for lending. A carefully-constructed plan, based on the best realities you can envisage, will always gain a more positive response.
A business budget also needs a degree of flexibility built into it. The unexpected always happens! Keeping it so tight that there is no wriggle room will lead to problems.
A final often-asked question: how often should I budget? Obviously, one tied to your fiscal year makes sense. However, there is also often a need for longer-term planning and short-term on-going assessment. The former will likely have a looser structure, and be more of a future plan than a tied-down budget. The latter is useful for regular reviews, ongoing measurement, and maintaining cash flow management. The analysis of key spreadsheets keeps you abreast of what’s happening.
The key is to plan and control your business activities in a way that works best for you. It also pays to be in regular touch with the business experts at your bank to keep them informed and pick their brains. It’s great to have an on-your-side sounding board!
Herring Bank offers a variety of merchant services to our business customers. If you have questions about managing your business’s financial success with any of our merchant services, please call (888) 283-4564. A Herring Bank representative would be happy to help you!