Budgeting can help you streamline your business processes, allocate funds where they are needed most, and make financial decisions with confidence. Once your master budget is in place, the way you handle cash flow, spend limits, and other elements of budgetary management can make a big impact on how well you are able to meet your business goals.
Learn how to manage budgetary constraints while also ensuring your business has the liquidity necessary to seize emerging opportunities.
What is a business budget?
A business budget is a financial plan that determines exactly where you’ll spend your business’s money over a set amount of time. The scope can be monthly, quarterly, annually, or over any time period you choose. This allows you to prioritize spending so you can meet goals more efficiently.
To create a useful budget, you should keep in mind past fiscal performance and have an understanding of business forecasting methods. You’ll want to be adaptable in case unexpected changes affect your finances, but also keep in mind long-term goals that will influence your spending in the future.
Why you need a business budget
According to a frequently cited study conducted by Jessie Hagen of U.S. Bank, 82% of failed small businesses cite cash flow problems as a reason for going under. However, you can confidently manage challenges, losses, and profits throughout the year with a master budget.
Because every business has limited available capital, you’ll need to decide where to distribute funds so they will make the biggest impact. A smart budget will help your business stay on the right track, grow faster, and make sound financial decisions.
Budgets help plan for the future.
A well-managed budget can help you realize how profitable your business is. It can also help you find under-utilized funds that can be reinvested in more useful projects. You'll have a better understanding of each cost you incur, how to control those expenses, what procurement strategies to adopt, and what projects are financially viable. Simply put, budgets help you manage your money and prevent overspending.
Who should be involved in establishing company budgets?
You can tackle the task of creating a budget in one of two ways. With a top-down approach, senior leaders set spend limits and a budget for every department in the company. The bottom-up approach allows each department lead to create the budget for their teams. However, the executive leadership still sets a total spend limit and lets each department know how much money is at their disposal.
What effective budget management can do
Budget processes can be different for each business, but every organization can benefit from budget management that keeps spending in check. Many companies have a delay between when company cards are charged and when the expense reports reflect those charges. In many places, there can be a full month gap, which leads to accidental overspending.
Want to see an example? Check out this story about Golf Genius Software to see budget management making a big impact.
5 budget challenges (and how to overcome them)
The budget management process isn't just about budget planning and getting finance teams in line with company goals. While these are important parts of the budgeting process, your workflows should also be fine-tuned to address revenue challenges and promote optimal cash flow. With that in mind, here are five common challenges and how to overcome them with a well-rounded budget management strategy:
Understanding expenses
One of the most common challenges you'll encounter when implementing a budget is misunderstanding your expenditures. Ensuring budget accuracy and tracking outgoing expenditures for the entire organization is critical to maintaining adequate reserves.
You'll need reliable spend data to budget correctly. You will also need leeway to cover unexpected costs that may arise, such as machinery repairs, overtime costs, etc.
Overestimating income
Accurately estimating your company's income is another common hurdle in budget management. While you can't predict income down to the exact dollar, you should have a good idea of how much your organization will bring in during a given time frame. Be conservative with your estimates and develop a reliable formula for calculating future income based on historical trends.
Learning how to estimate income will help you make budget adjustments based on current sales trends. For instance, if senior leadership discovers that sales are lagging behind initial estimates, they can tailor your budgeting process accordingly. This may include limiting employees' overtime opportunities, scaling back current spending, and taking other precautions until circumstances change.
Failing to adjust for market conditions
The market is always changing. Budget management means staying apprised of these trends, which is often easier said than done. If your finance teams are even slightly out of tune with the current market trends, it can lead to inaccurate spend data and major shortages.
Regardless of what budgeting approach you adopt, make sure to regularly review your budget to accommodate any changes in circumstances or market conditions. This review process works both ways.
If you are earning more than initially predicted, you may be able to adopt more ambitious procurement strategies. Conversely, if you are expecting a market downturn, prepare for the worst by increasing savings.
Ignoring debt repayment
As the budget manager, you should always have a clear view of your company's financial obligations and debts. Track how much you owe and to whom. While you don't necessarily have to pay off all debts ahead of schedule, it's important to ensure you aren't bogged down by financial obligations either.
Consider adopting a zero-based budget to ensure you are allocating enough resources toward settling debts. Paying off a few loans early can save the company thousands in interest payments and give it the financial freedom necessary to seize future opportunities.
Failing to have adequate cushion
No matter how skilled you are as a budget manager, you can't predict everything. Fortunately, you can protect the company by implementing a reserve strategy.
You need to retain enough money in savings to cover the organization's standard expenditures, as well as any surprises that may pop up. Consider how much money you need to cover critical expenses. Maintaining adequate reserves is key to business continuity efforts and will give the company the stability necessary to weather nearly any storm.
What should a business budget include?
In order to create a corporate budget, you’ll need to include all of the most important budget categories and other elements. If you have a previous year’s finances to refer to, that can be helpful for projecting your needs for the coming year. Here's a quick checklist to help you build a budget:
Gather the right information
Start by calculating your revenue. Make sure to include all income sources and payments so you know how much capital you have to work with.
Next, figure up your fixed costs. This includes any cost that is recurring and consistent, such as taxes and rent. You'll have to pay these business obligations no matter what.
You'll also need to account for variable expenditures, such as the procurement of supplies and inventory. These expenses can vary from month to month. You can also manipulate procurement strategies as a cost-control measure to unlock savings.
After you've addressed fixed and variable expenditures, you'll need to predict extra spending and surprise costs. This means preparing for one-time purchases, like buying new tools or making repairs.
You must set aside enough in savings to cover these surprises, just in case a few of them pop up during the current budget cycle. Once you have all the info you need, it's time to compare your incoming cash to your outgoing costs.
Crunch the numbers and make sure your incoming revenue exceeds your expenses. If it doesn't, you've got some adjusting to do. You'll also need to decide how to use any excess money. Some common options include putting extra money into savings, investing in the procurement of new tools, or hiring additional employees.
Learn more about creating a business budget and the different types of budgets your business could benefit from.
Business budgeting methods
Now that there’s a budget management solution in place, it’s important to find the budgeting method that works best for your business.
Common budgeting strategies businesses use
Here are some of the most common budgeting methods, which include:
Incremental budgeting takes budgets from previous years or quarters and makes incremental changes for upcoming time periods. This means you can use a previous or current budget as a starting point for projected costs while also accounting for increases in sales or inflation.
Zero-based budgeting is essentially starting a budget from scratch and justifying the spending limits for every category, without defaulting to previous budgets. This can help you cut down on excess spending and allocate resources where they are most needed.
Value proposition budgeting involves looking at every single item in the budget and determining its value—to your staff, your customers, and any other stakeholders who may be impacted—and its cost. With careful consideration, you can eliminate expenses that don’t bring enough value to your business.
Activity-based budgeting is a results-focused approach because it requires you to list the goals you want to achieve and then work backward to see which activities will help you meet those goals. From there, you can fund these activities that will directly and indirectly help you achieve the desired results.
It is important to understand how each of these budgeting methods will affect your company and prepare for who you will need to involve to make sure processes run smoothly.
Budget visibility
Budget visibility refers to how good of an overview you have over spend, pay, team salaries, projects, and other variables that impact your company's bottom line. Organizations with good budget visibility have better control over procurement, savings, cost of doing business, and other financial aspects. In turn, these companies are better equipped to hit their profit goals and thrive amid shifting market conditions.
How to manage your business budget
Once you have created a plan, budget management then comes with its own set of challenges. You want to avoid overspending while still offering flexibility to various departments that need a certain amount of cash on hand.
Budget management resources
Keeping track of a budget requires a little planning. Some common resources include:
- Spreadsheets
- Accounting software
- Dedicated budget management software
Spreadsheets
Spreadsheets can get the job done, and they are the way many businesses have managed expenses for years. However, they can be difficult and time-consuming to use, they often have minimal data security protocols, and they increase the risk of human error because everything has to be entered manually.
Accounting software
It’s possible that you’ve seen accounting software that offers budget management capabilities, and while they are likely much more sophisticated than simple spreadsheets, it’s important to make sure the software offers everything you need to meet your financial goals. Check that it is secure, easy to use, and offers visibility into the way money is spent in every department.
Budget management software
Utilizing budget management software can streamline the budget management process and make sure you always know exactly where your money is going. With the right tool, you can see transactions in real-time, control spending, and send funds all in one place. You’ll want software that is easy to understand and simple to use so that everyone who spends can have insight into their actions.
Budgeting vs. financial forecasting
Budgeting and financial forecasting are key parts of overseeing the fiscal health of your business. However, they are not the same thing. Budgeting is when your finance department creates a detailed plan for managing the company's income and expenses over a specific period, typically a year.
Managing spending and income helps boost savings, fund all departments and their projects, and give your teams the resources they need to thrive.
Financial forecasting looks beyond saving and managing money. It focuses on predicting what will likely happen next so you can take steps to achieve better financial success.
Forecasting can support an employer by providing data about the cost of doing business in the future so they can adjust procurement, control costs, and decide whether to take on a new project. Organizations use forecasting to look ahead and guide strategic decision-making.
Why are budgets important?
Budgets are essential for long-term success in any business. Without a solid plan, you’re essentially building your company’s finances on guesswork and hope, which can only take you so far. Creating and sticking to a budget will not only help you achieve your goals but also prove to financial institutions and investors that your business is worth supporting and help in making informed decisions regarding your business’s future.
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