How to create a successful budget for your business
With January's fresh start feeling, many decide this is an excellent time for reflection, review and reprioritising for the upcoming year. Doing this for personal or company spending is no exception! Yes, you have to spend money to make money, but as you (hopefully) already know, that's not an excuse to spend money like it's going out of fashion.
So whether you’re planning a small independent project, or the finances for your entire business, an effective spending plan is a key element in determining whether your ventures will be a success. But equally important (yet more difficult, and thus often overlooked) is the follow-through on that plan.
Many a story has been written about inadequate budgeting, but is the real culprit inadequate enforcement? In this article we have a look at:
- Why we set budgets in the first place,
- What you can use to help you plan them,
- The planning process itself
- The final step - 'enforcement'.
First, let’s get things straight. We subscribe to Investopedia’s definition “a budget is an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis.” We also subscribe to their assertion that “Budgets are an integral part of running any business efficiently and effectively.” The revenue estimation part is important, as many think of budgets purely in terms of how much they can spend, but this money has to come from somewhere!
An effective and thought through budget should be a cornerstone of any business, or project plan. Without sufficient detail, you hugely increase the risk of overspending – an indulgence that could prove very costly (sorry, couldn’t resist). Joking aside, failure to adequately plan your company spending - and manage it - will have a serious impact on the long-term sustainability of your business.
We budget, essentially, because we need to. Without it, you’re somewhat lost with no compass, with a poor one, you’re still lost - just a little bit less so. With a good one however, you’ve a map by which you can navigate, prioritise, make decisions and generally feel more confident and in control. It can also help you to clarify the larger goals you’re aiming to achieve; get everyone on the same page; prevent spending funds you don’t have; prepare a buffer for emergencies; and give you insight on spending practices (and where they can be improved). Furthermore, a consistent history of creating accurate budgets (and sticking to them) is a bellwether of management capability, and can be a huge confidence-booster for potential partners, suppliers or investors (especially if you’re a small business).
With it’s obvious importance, it’s no wonder the need to set and maintain a budget for a team or project can seem daunting. So how do you know that you’re doing things right? How do you ensure you’ve considered all the parameters? And, moreover, how do you enforce it effectively? Making sure all the funds are spent judiciously, timely, and on the most effective things.
Setting KPIs and measuring ROI
On the face of it, getting to this time next year and realising that you've only spent half of a budget may seem like better budget management than over spending, and perhaps it is, but how do you know? Though it can seem daunting, setting business KPIs (Key Performance Indicators) and targets upfront can help you understand if it is money well spent, or money that could be better spent elsewhere. Measuring your return on investment (ROI) is something else that you need to be doing, if you're not doing it already. KPIs and ROI are however topics in their own right, and we'll cover these in the future.
Take advantage of technological help
Fortunately, managing your spending doesn’t have to be as complicated as it first appears, largely because there are now a wealth of online resources and business tools that address this very area.
As your budget will be affected by cash flow, it makes sense to have a reliable app to manage that. As, although many accounting software providers (such as QuickBooks and Xero) offer some basic services that cover this ‘in-house’, it is usually more productive to have a dedicated tool - especially for larger businesses. To see how much these tools have improved in recent times. Just take a look at Entrepreneur's list of five of these from back in 2011. Of course, as big fans of Float and Futrli, we’re always going to recommend them here too - especially as they have dedicated budget and KPI features!
Those in the software development world will likely be familiar with the term GIGO - garbage in = garbage out. It applies here too - now you’re armed with an accurate cash flow forecast, it’s time to consider dedicated budgeting software to help you further. For options, check out Scoro’s list of 14 budgeting software tools, if it’s for a standalone project, you may find the money management in popular project management tools works best. Failing that, you could use one of Smartsheet’s templates, or even Excel (although we wouldn’t recommend it - given the manual labour involved, as well as the high chance of errors).
There are many options to make your budgeting life both easier and more accurate.
The budgeting process
When summarised, the process is actually fairly straightforward. As with most things though, the quality of your result will reflect the quality, and thoroughness of the process you follow to reach to it.
First, decide on the type of budget you’ll create. The two main types are static and flexible. Where static budgets remain with the original figures for the duration, and flexible budgets react to select variables when they change (i.e. sales, revenue, external factors). See here for a more detailed comparison.
Regardless of which type you choose, the next step is to determine the funding that will be available for the budget. If it’s a project, it might be a fixed amount, but for a wider business, this entails predicting future revenues.
Third, effective spending management requires you gaining an accurate idea of how much the entire undertaking will cost in the first place. And although this might seem like an obvious point, not all costs are as immediately obvious as others. Hence why so many projects end up over budget!
To do this, you’ll need to combine accurate historical data with what is anticipated to happen over the lifetime of the budget. The accuracy of your estimate depends on the quality of the data you are using to make it (see GIGO, above). Fixed costs are usually far more reliable, but variable and one-time expenses can be much more tricky.
Often the larger the project the more likely initial estimates of the total expense will be unrealistic. As it’s far easier to forget to consider some ‘small’ costs (or just throw out an arbitrary number for them). Yet these really do add up, and due to the size of the project, end up becoming the seriously large numbers headline writers are so fond of quoting.
For example, you’ll likely have thought to include factors such as staff wages and material costs in your budget – but what about potential extras like travel costs, equipment updates or necessary software? What if someone leaves the project, taking their knowledge with them? The time-delay, cost of training replacements, and team disruption all place a drain on resources that is difficult to quantify.
Thus, during the process it’s vital to consider every aspect of your project or task in as much detail as you can. And, of course, mitigate risk - by ensuring some of your budget is allocated to an emergency fund.
Of course, exact costs won’t always be available, and you’ll likely have to use at least some estimates in your calculations. For example, you might not know exactly how much time your project will take, which can make it difficult to forecast figures such as staffing costs. A good tip is to break things down into small individual tasks and allocate an amount of time to each. It may sound onerous, but ‘estimate’ is defined as ‘an informed assessment of an uncertain event’ for a reason. Remember that people tend to overestimate their productivity too – so do allow for that, as well as delay factors such as sickness and other absences when making your estimates.
Similarly, you might find yourself needing to estimate costs for materials or outsourced work for a project, and it can be difficult to find an exact figure ahead of time. In this case, you can conduct market research to help you come up with an accurate projection – although it’s sensible to always err on the generous side in order to preempt any unexpectedly large quotes. A useful guide to improving the estimation process itself is here.
The fourth step is gathering all of the data together and putting it in to your tool of choice. Having done this you can test it against different scenarios to determine the budget’s viability. Perhaps even back test it against scenarios that have occurred in the past! After which, you can choose the one you deem the most appropriate and likely.
For a more detailed breakdown of the sub-steps to those we’ve just covered, we’ve found a useful place to start is this 13-point plan.
Now it’s time for the difficult part - putting the plan in action, and sticking to it!
‘Enforcing’ (or sticking to) the plan
Enforcing is a bit of a misnomer because, as with any plan or change, obtaining buy-in and agreement from those who will adopt it is key. If your stakeholders and colleagues agree with, or at least accept your budget then they’re far more likely to feel invested in ‘achieving’ it. Making ‘enforcement’ unnecessary, or even counterproductive.
Information abounds regarding how best to achieve this, but the broad theme that seems to come up repeatedly is ‘communication’. If in doubt, over communicate. Involve the right people in the process, perhaps even ‘reverse the flow’. Communicate the plan effectively. Be honest, listen and respond to queries. Ensure there is an understanding of why the plan is the way it is. Be prepared to change your budget if flaws emerge.
Further tips for sticking to your budget include: creating an element of accountability, so colleagues know what they are responsible for. Reviewing it regularly, to ensure everyone is on track. Identifying problems early, they’re much easier to solve when you do! And simply being realistic in the first place.
A frequent assertion in the information available online is that you need to ‘control your expenses’, or even that the budget itself will control your spending for you. Unfortunately, little detail is provided as to how this happens - probably because there is little evidence to suggest that numbers on a page won't be ignored if it’s convenient/necessary. It’s why you often hear of the forced implementation of ‘cost-cutting’ measures after an expenses blowout.
It doesn’t matter how good your budget is if you don’t manage it well and continually track your expenses. Yet often the blame is laid on the more opaque variable costs that are difficult to manage, such as employee expenses. Given the technology available today, surely this is archaic? We believe it’s far better to pre-empt this, by taking real control over employee spending whilst also saving time in the process (and time = money).
Tracking is only half the battle though, it’s why we developed Expend’s new Flex Card. With it, you are not only able to track what employees are spending, where they are spending it and when (in real time). As well as gaining hands off control by pre-defining a spending limit in advance (by amount, time, whether it’s one off or repetitive) that encourages staff to stick to their budget, and actually prevents overspending. Just as importantly, our Flex Card gives them an effective and admin light way of spending it without the constant 'can I have money for, can I have...' Employees shouldn't sound like your children, or even worse feel too embarrassed to ask for money from a budget that you've given them.
Control, oversight, peace of mind, saving time and an empowered team. What more do you need?
On the surface, budgeting seems simple. But that façade quickly falls away to reveal a complex, nuanced process containing so many failure points it’s a wonder anyone gets it right.
However, despair not! From software to mobile apps, the wonders of technology mean it’s easier than ever to obtain tools to help you that perfectly suits your accounting style. Giving you the best chance of sticking to your budget and making your business a success.
Of course, regardless of how you budget, the process is key. So make sure it’s good! It'll help when you have to do it all over again the next time.