used with permission from SBA.gov
by Caron Beesley
Budgets are difficult to plan and maintain at the best of times – unexpected events, cash flow problems, supply chain issues and more can all reap havoc with even the most thoroughly planned business budgets. The other problem with budgets is that many of us set budgets in our business and personal lives at the beginning of the year, and then file them away until the year-end rolls around once more.
And this is where the problem lies: your business is never static, and your budget shouldn’t be either.
Here are some tips for developing and managing a dynamic budget that can keep you on course all year long.
Why Budgets Are So Important
Budgets are enormously important to the operation of your business; not only do they help you manage your costs, but they also help you determine whether you profit goals are within reach and keep you on the right road from month-to-month. In its simplest form, a budget is a detailed plan of future receipts and expenditures. Think of a budget as a tool for providing control. For example, by looking at next quarter’s budget you can anticipate peak periods and schedule stock and labor to handle the sales volume. You can also plan vacations, marketing activities and inventory taking for slow periods.
Most small business owners generally use a budgeting method that starts by identifying the profit they want to make and then listing out the expenses they’ll incur in order to reach their goal. There are several resources at the end of this article that can help you build your business budget.
Update Your Budget Monthly
If your budget is going to work for you, plan on revisiting it on a monthly basis with your management team and update it based on your business performance and expenses for the prior month. Take a look at your sales forecast – how’s your pipeline looking? Are there any indicators that you need to make changes to your budget to cover additional inventory or staffing needs? Look at your expenses – are they as projected, or do you need to cut back in certain areas to ensure you stay on track?
Make Changes That Can Have a Positive Impact
Based on your monthly review, make changes to your budget and then wait to see what impact these have to your income and profits – by month and by year. For example, perhaps you are under-investing in marketing – adjust your budget and see what happens to your pipeline next month or over a six-month period. In your next review cycle, look to see if you are a getting good return on marketing dollars spent per sales lead. Then use this information to inform future planning decisions about where best to allocate your costs.
What about receivables? Are there ways you can speed up your invoicing and payment cycles to keep cash flowing into the business?
Respond to Unexpected Changes
Use your budget to help you adjust to the unexpected. Say, for example, an important client cuts their own budget and reduces the amount of business they do with you. Take a look at your budget and how this reduction in revenue affects your cash flow and for how long –- meaning how long will it take to find a new client to replace that important revenue source and what will it cost you in terms of marketing or hiring costs to help you uncover new business?
Tie Incentives to Budget Performance
A great way to get everyone on-board with the idea of focusing and interacting regularly with your budget is to tie performance bonuses to it. So, at the beginning of the year when you plan your annual budget, set parameters for performance tied to profit, but also other categories such as return on investment in marketing dollars, keeping expenses at or lower than plan and so on.