4 Tips on How to Execute an Effective Business Budget
Sometimes when entrepreneurs go into business, they get so excited about the product they intend to sell that they easily neglect how much time and effort goes into managing the financials. In order for any business to succeed, it has to conserve its resources efficiently. This is only possible when management understands how to coordinate and implement administrative decisions based on the guidance of a structured budget. Being able to budget isn’t just necessary to govern a business, it’s also beneficial to the selection of individual operational investments or projects. Without a structured budgeting process, there’s no reliable method for estimating profits, or for controlling expenses.
Here are a few important strategies to exercise in your budgeting process if you want your company to grow:
- Specify Your Business Goals – Good goals are clearly defined, measurable, realistic and timely. Once you’ve launched a business venture, it’s advisable to be less aspirational and more practical, especially when it comes to budgeting. Use clinical and mathematical language to inform your budgeting process. For example, deciding to “make money” is not a specific goal. On the other hand, deciding to “make $100,000 in profit” is specific. Always set measurable goals defined in parameters that can be compared and calculated.
- Calculate the Bottom Line – No budget is accurate unless it includes a Cost/Benefit Analysis (CBA).CBA is an analytical technique for making business decisions in a relatively quick and easy way. Preforming a CBA involves measuring cash inflows and cash outflows so as to determine a sustainable balance between profit and loss. If cash outflows exceed cash inflows of a given business decision, then that decision is harmful and should be avoided because it creates a loss.
- Prepare for the Unexpected – Whether or not you’ve run a business before, we all know that life can throw some sudden curveballs. You could get a flat tire on your way to a product pitch for instance. Or a kitchen fire can destroy your stove and make it impossible to serve the lunch crowd. Such random risks arise when you’re least expecting them, and usually when the budget is tight. Prevent fear of unexpected costs when budgeting for your business by making sure you have some extra cash on hand. Although you might be tempted to bank any surplus revenue, it’s advisable to routinely put some aside into an emergency fund instead.
- Don’t Go it Alone – It doesn’t matter how simple or small your business is as you start out, in order to file taxes on time and stay compliant with the law, you have to consult with licensed advisors. That’s why you might want to get help with your accounting. Consider hiring a certified public accountant (CPA), bookkeeper, or using an online service when creating formal budgets. A CPA will typically cost more than online services, but can normally offer more tailored service for your specific business needs. A bookkeeper can provide basic day-to-day functions at a lower cost, but won’t possess the formal accounting education of a CPA.
Although developing a budget for any business can seem intimidatingly complex, the actual process is simple. It’s a matter of systematically applying basic accounting and business principles to the particulars of your ventures. There are very few business owners you’ll meet who love budgets, finances, and spreadsheets. That’s simply not why people get into business ownership. But budgeting is a part of life when you own a business. So, knowing step by step how to create a business budget and manage it efficiently will make your job as a business owner just a little bit easier. It doesn’t take a genius to practice sound budgeting. All it takes is a willingness to make choices based on prevailing facts.