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How to Build and Use a Business Budget That's Useful All Year Long

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How to Build and Use a Business Budget That's Useful All Year Long

By Caron_Beesley, Contributor
Published: June 3, 2013 Updated: June 3, 2013

Business budgetBudgets 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.

More Information and Templates

For more information on crafting a budget for your business, check out this easy-to-follow guide – Budgeting in a Small Service Firm – from SCORE that explains how to create, manage and adjust a small business budget. SCORE also provides a downloadable and editable 12-month budget template.

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Image courtesy of Casey Konstantin, Flickr

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Updating your budgets monthly is a good practice to follow. Your budget shouldn't be static because, you can't predict the future. You need to continually adjust your budgets to accommodate for unexpected expenses, a change in markets, and other events out of your control.
great topic. But actually I'm in the trouble of handling my budget for business month after month. This article is really useful for me at this time.
I like to use budgets as a simple track to follow. But if I deviate from the path not to be too hard on myself. Some times extra expenditure can not be monitored immediately! thank you for the great post!
I appreciate your information Caron. I adopt an even stronger position with the small businesses we advise and train. The “Budget” is really the backbone of the “Strategic Plan.” In this mind set, you set your future goals through an optimizing process – I use one called “Eupsychian Systems Analysis” where goals are derived not through a wish list, but through a careful analysis of what is possible in an ideal world. These goals are then constrained by the reality of fixed and variable constraints. Also, goals must be specific, tangible and measurable if they are to be useful. In this manner, the goals provide the basis for creating the strategy that supports the desired outcomes. By “Planning Backward,” it is possible to identify each of the strategic elements needed to achieve the goals, and sequence them so that you have a way of know what you need to do next month, next week and even tomorrow to stay on the path to achieving the goals. The second equally important benefit of this approach to goal setting is then using the goals – or budget – as the basis for regular deviation analysis. By setting up the goals on a “Dashboard” and only looking at the areas where performance is different from that projected, you know immediately where to focus your management attention so that you can either bring the operation back on track, or modify the track in light of new information to continue to assure your overall profitability.
instead of "update your budget monthly" it would be better to think of UPGRADE you budget monthly... it's closer to the true meaning of the real life
While making a budget for my website on I was not really sure about the exact ROI but had made sure that my operating costs and expenses stay low at any cost. Will make sure to check the other points as they are quite essential.
Great topic - so many benefits for budgeting in your small business. not only can it help you better manage your expenses and increase your profits but can help you get a needed business loan - bu understanding how much in payments you can afford or setting your business to earn more to meet those payment requirements. Great topic for this age and time.
The SCORE Excel template is excellent. As a nonprofit educational organization, we've been recommending it for years as well as offering a printable version as a worksheet to budget for twelve (12) months (-- or (1) month (--). These are helpful tools used by counselors to teach clients the cash flow process before they advance to using an actual spreadsheet application.   This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.

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