5 Steps to Building a Better Budget for Your Business
If you struggle with budgeting, then the new financial year is a great opportunity for pressing the “reset” button and learning to build a better budget for your business.
The old saying that “if you fail to plan, you plan to fail” runs true for budgeting.
If you don’t control how money is spent in your organisation, your business risks running into a range of challenges. The most obvious is that you could run out of money, but that’s not the only challenge a business with poor budget management can face.
Without controls over how money is spent, it’s difficult to measure whether the money you are spending is being spent in line with your business’s expectations and strategy. If you lack controls, it’s also impossible to identify and manage variances between planning and execution, and to ensure you have adequate money and cash flow at all times.
Ultimately, budgeting empowers your business to reach and fulfil its goals by providing a financial plan for achieving them. As a general rule, you’ll probably want to budget for a year in advance.
A Planning Process
Most people think that budgeting is a financial process. After all, budgeting is chiefly concerned with money.
However, the truth is that budgeting isn’t a financial process – it’s a planning process.
So keeping that in mind, let’s explore five steps to building and managing a better budget for your organisation.
Step 1 – Know Your Other Plans
In order to effectively plan how you’ll spend money, you need to work out what your business’s plans for the next year (or maybe even the next few years) will be.
When working out these plans, consider what your goals are. For example, are you aiming to increase sales or distribution, further develop your products, hire more staff, or something else? By identifying your organisation’s goals, it will be easier to identify the associated costs.
Your accountant may be able to help you with your planning and goal setting process, but they should never develop your budget without your input.
Step 2 – Identify High Level Tasks & Projects
Once you’ve identified your plans and goals, identify higher level tasks and projects (and when they will occur), then allocate funds to achieve them. For example, if your goal is to increase sales, this may require hiring an additional sales person (and the associated costs) or financially incentivising your existing sales team to achieve more sales.
Work out how much you will need each month to fund these plans, and add this to your month’s budget (if you don’t know the exact amount just estimate as best you can).
Step 3 – Break Tasks into Smaller Elements
In order to ensure you’ve planned your spending correctly, break your higher level tasks and projects down into smaller elements. Then allocate funds for each of these elements.
For example, your first big project may require you to bring in a specialist consultant and cover staff travel. Make sure your planning includes funds for each of these elements of the project.
When allocating funds, you should also look for any regular or recurring costs and include them in your monthly budget. Such costs may include software licences, rent, staff wages, or loan repayments. Remember to think about which account you will use to fund the expenses in your budget. In planning this, identify each of the costs separately. You may need to make some assumptions about these costs, such as the number of staff will you have for the year, or the volume of raw materials will you need to buy to make the products you are planning to sell.
Step 4 – Identify a person who will be responsible for managing each element of the budget
If someone is responsible for managing each budget element (it may be one person or many depending on the size of the budget) it is much easier to make sure that your organisation stays on track.
Step 5 – Review, Review, Review
If your budget is a plan linked to financial outcomes, the only way you can see if your planning is effective is to measure the outcomes. So it’s important to regularly conduct reviews.
Each month, review your budget with the people in your business who are responsible for actually delivering it. Ask: Is your budget allowing them to achieve your business goals? Is your budget effective? Are the problems you’re running into planning problems, cash flow problems, or people problems?
At least once a year, you should also identify major variances between how you planned to allocate and spend funds, and how those funds were actually spent. Consider whether these variances occurred due to ineffective or inaccurate planning in your budget.
If this is the case, do you need to change your methodologies and assumptions when planning your spending for the next year? Alternatively, variances may indicate problems in the execution of business plans, rather than problems in the budget. If that’s the case, explore ways to address these problems to prevent them reoccurring.
It’s All About Planning
Always remember: effective budgeting is about creating a plan linked to financial outcomes.
By treating your budgeting process as a planning process, and following the steps outlined here, you’ll be able to build a better budget for your business.
What are your biggest budgeting bugbears? Which part of budgeting do you find most difficult, and how have you learnt to overcome this? Let me know in the comments below.
About the Author
Karen Stennett is a Senior Management Consultant with Stennett Consulting. She specialises in financial management and procurement process optimisation and training. For more information about Karen or the team, or to learn how we can help your business build a better budget, drop us a line at firstname.lastname@example.org.