Building Your Business Budget? Ask Yourself These 8 Questions First

A solid corporation runs on a solid foundation. However, you don’t have to head a Fortune 500 company to treat your budget like it belongs to one. Planning for expected costs, comparing them to forecasted revenue, and then allowing some wiggle room for unexpected expenses is all part of the budgeting game.

Before you sit down to plan your business financials, ask yourself and your management team these important questions:

1. How much revenue is expected?  Unfortunately, there is no crystal ball for businesses to predict the actual revenue that will come in from one year to the next, but executives and finance experts can make some calculated guesses. Look at the past three years of revenue and identify your growth percentages. Then look a little more recently. How did your sales look in the past six months? Are there some upcoming new products or services that will give revenue a boost in the coming year? With these things in mind, come up with a conservative number for expected revenue and base the rest of your upcoming budget on it.

2. What are the business expenses?  Bringing in revenue is great, but you won’t actually make money if your expenses surpass income. Even businesses with many years of experience must frequently reevaluate their business expenses. It’s best to hire a professional auditor or auditing company to look over your ingoing and outgoing expenses to give you a rundown of where your money is going. Look back a few years and figure out what patterns are developing in order to best predict what those expenses will look like in the coming year.

Common operating expenses include:

3. What does cash flow look like?  The cash management portion of your budget is important because it shows how much credit is available to extend to clients and customers before a potential liquidity problem would arise. No business ever wants to run out of money to pay its operating expenses while still waiting to get paid from buyers. This part of your business’s budget should break down spending into smaller segments–either monthly or even weekly–so that ends meet every time.

Every business has a different process for receiving and redistributing income. For example, a corporation may need to pay its utilities or employees before customers actually pay their invoices. Other businesses, like retailers, often have the necessary cash to pay their other bills up front. Understanding cash flow helps you budget how much needs to remain in your accounts at all times to cover costs.

4. Are there any large projects on the horizon?  What expenditures outside operational expenses are looming? Consider items like website redesign, office remodeling, investment in technology, new product launches, and travel expenses for conferences or client meetings. Look for costs that are above and beyond what you spend day-to-day and month-to-month to keep your business running.

5. What will next year and the year after that look like?  Maybe you don’t have any out of the ordinary projects planned for next year, but how about the year after that? Instead of putting off planning for large projects until they are on your doorstep, start earmarking that money in advance. Decide what you can feasibly save from your income this year and in the coming years and that will help you predict when you can launch larger projects. It’s always best to look at least three years ahead.

6. Is there enough of a buffer?  Do you have enough cash to account for anything unpredictable? There’s no way to really put a number on what you will need money for as a business owner–there are just too many variables–but you should have a responsible amount put away for any emergencies, mistakes in production, or damage control that could arise. Set a goal based on how much money you want in this fund and then build for a few years to get there. If the buffer gets wiped out one year, rebuild it the following one.

7. Where should I spend more?  If your finances and upcoming budget look sound, decide if there are spots where you could spend a little more. Is it time to hire another employee or two? Or perhaps a contractor? Maybe your online marketing budget could use a little bump. Make a list of areas where you think more spending would ultimately help your business earn more and then prioritize them based on what you can realistically afford. Remember that you don’t need to spend just to spend; however, if you can identify operational areas that could benefit from higher budgets of their own, there’s potential to elevate your revenue.

8. Where can expenses get cut?
Once you know your current spending, where you plan to spend more, and what is on the horizon as far as large expenses go, it’s time to reassess where your money is going. Remember that small savings really do add up. Revisit your utility bills, rental agreement, and vendor contracts. Are there any places to reduce services or ask for a loyalty discount? Taking just a few hours to look over spending and devise some ways to cut back has the potential to save you a lot in the long run.

Annual budgets provide the framework for the financial decisions your business makes for the rest of the year. Create your budget and work alongside financial experts to ensure you haven’t missed any important points along the way. With the right budget in place, you can help your business see continued growth year after year.

Post by: Jason Kruger

Jason Kruger has more than 16 years of accounting and finance experience in both public and private industry accounting. Since 2008, Jason has acted as the CFO for many of Signature Analytics’ clients, providing them with the financial analysis they need to grow their businesses and make more data-driven decisions. He has direct experience with many complex accounting and financial issues within a variety of companies and industries, including software, technology, biotech, manufacturing, food/beverage, apparel, construction, and advertising.

Company: Signature Analytics
Website: www.signatureanalytics.com
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