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.
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 offer insight into the financial health of your organization, so it can help you attract investors. Venture capitalists, angel investors, and financial institutions will likely need to see how your company plans to use its money as part of your overall financial strategy.
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.
A budget can even provide insights once you know where all of your money is going. Analyzing your expenses can help predict seasonal changes in your business and other trends, allowing you to reallocate funds based on those needs.
Who should be involved in establishing company budgets?
There are two general methods for establishing a company-wide budget. Both achieve the same result, but get there in different ways:
- A top-down approach means that senior management creates a budget for every department in the company.
- A bottom-up approach allows department leads to determine the budgets for their individual teams.
What effective budget management
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.
A strong budget management solution can automatically track and report spending in real time, removing the mystery and keeping everyone who spends in line with budgetary goals. In addition to saving money by not going over budget, some software can also save your finance team dozens of hours each month, because they no longer have to manually create expense reports.
Want to see an example? Check out this story about Golf Genius Software to see budget management making a big impact.
Your budget will be determined in part by the accounting method you use, because there are different ways to account for revenue and expense.
Cash accounting means recording income and expenses in the same period in which they are received and/or paid. In other words, the transactions are only accounted for once cash has changed hands. This can be a great budgeting method for small businesses, because it is a straightforward approach to accounting.
Accrual accounting allows you to record income before it is actually paid. This method is often the right choice for companies that have inventory, or those that make sales on credit.
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. Use the following list to get started.
Gather the right information
- Add up all of your income sources so you know how much capital you have to work with.
- List your fixed costs, such as rent and taxes—you’ll have to pay these business expenses no matter what, but it’s still good to account for them in your budget.
- Add up your variable expenses. These are expenses that can vary from month to month or quarter to quarter. This can include office supplies and inventory.
- Predict extra spend, such as one-time purchases or repairs. This involves setting aside a certain amount for emergencies.
- Look at your cash flow—what is your income compared to your expenses?
- Once you have all the information you need, you can plan for the future. If you are spending too much, you can adjust your budget accordingly. You can also set aside funds to reach new goals in your business.
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, even if that means using a different strategy that you may have not tried previously.
Common budgeting strategies businesses use
Explore the following budgeting methods to learn what will work best for your company.
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, then work backwards 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 be prepared for who you will need to involve to make sure processes run smoothly.
The more visible your budget is, the easier it will be to stick to the amounts you want to spend. Visibility refers to tracking spending, ideally in real time, so that you’ll always know how much you have left in your budget.
This can also include easier tracking of not only who spent money and on what items, but also who approved the purchase, and why it was necessary. Greater visibility means it is easier to take responsibility for spending and avoid going over your set limits.
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:
- Accounting software
- Dedicated budget management software
Spreadsheets can get the job done, and they are the way many businesses have managed expenses for years. But 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. And if you’re worried about expense fraud, spreadsheets also make it easier to intentionally or unintentionally mislead others about where funds have been spent.
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
While budgeting and financial forecasting are both important parts of business planning, they are not the same thing. Financial forecasting is a roadmap of where the company is headed, keeping in mind big-picture goals and the economy at large over the course of many years. This should also weigh your assets and liabilities, operating costs, and cash flow.
These predictions are useful in many ways, including assessing your budget. Once you have determined the financial forecast for your organization, you may realize where you need to increase or decrease spending in order to align more closely with your long-term goals.
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.