This is a guest post by Deepranjan Ghosh, the Founder of GeekyBucks, a blog delivering in-depth knowledge about different aspects of personal finance.
A budget is one of the most important management tools for your business. It makes you more aware of where you stand financially, so you know when and where you need to take action to keep your business afloat. In this article, I’ll talk about five important budgeting tips for your business.
A budget helps you to plan and make adjustments over the next twelve months so you have better control over your company’s finances. Both new as well as established companies can benefit from a good budget.
Among other things, you get clarity on whether you need to reduce costs, get money faster or increase the profit on your goods.
Whether it’s your first time making a budget or you’re about to make a new budget for next year, these tips can help you along the way.
Here are the top 5 budgeting tips for your business
1. Create an operating budget and a liquidity budget
An operating budget, also called a performance budget, shows income and expenses over a period of time, usually one year. With an operating budget, you can see if you want to make a profit or a loss.
If you’ve been operating your business for a while, last year’s numbers are a good indication to have to set up next year’s budget. If the company is new, you can create a budget based on:
- What it costs to produce each item / perform each service
- Indirect costs, such as rental of premises, accounting services, equipment, marketing, etc.
- What price to set for the product/service
Unlike the operating budget, which shows the final result, the liquidity budget deals with the cash flow in and out of your business. It shows if you have money to cover costs as they arise.
A liquidity budget thus helps both new and established entrepreneurs to know whether they need to take out loans, find investors or reduce costs.
2. Use price calculations
When setting up a budget, you need to know what price you want to charge for your goods or services. You can find the price by setting up a price calculation.
To make that calculation, take the costs associated with the product and add the profit you want to make over that. It is not uncommon for the profit to be as high as 300 percent.
If you have a lot of goods, this can quickly become a lot of work. In such a case it is common to make what is called a contribution margin.The profit must include both indirect variable costs and profits in the calculation.
Remember to update your calculations regularly as your costs rise and prices increase in your particular industry.
3. Get help if you are unsure
It costs to get help with budgeting, but a proper business budget is worth much more than a budget that does not reflect reality. If you are unsure of how to set up your budget or calculate costs, it is a good idea to ask for help.
Most business owners have to juggle many tasks. By delegatingthe budget work, you get more time for other tasks.
You can get good help from an accountant for this job. You should always set some goals for your business in advance, and take a review of administration costs, expenses associated with employees and what equipment you need to purchase.
4. Assess the risks
Have you considered the risks your company faces? There may be changes in the market or in the legislation that affects your industry, an increase in the number of employees, a new marketing strategy or a pandemic like the latest coronavirus situation.
By analyzing your competitors, you will also have a clearer picture of the coming year. It is especially important to know if your competitors are raising or lowering the price, and if they are coming up with new goods or services.
Risk analysis is one of the things you should have set up when creating a business model and business plan, but it is a good idea to update the analysis regularly, especially before you start creating a new budget.
5. Be realistic
The budget should help you steer your business in the right direction, and it does not help to have a management tool without being grounded in reality. Therefore, do not create a budget with the goal of impressing shareholders, investors, banks or other financers.
When you make a budget, it actually pays to be a little pessimistic – always budget considering higher costs and lower revenues than you think you will have.
If you have been operating for a while, you can look at what you have earned before, and take into account selling a little lesser than you hope for. Remember to expect some unexpected costs, such as sick leaves, loss of receivables, replacement of equipment, etc.
Along with accounting, a budget is one of your most important tools, and you should therefore make sure that you set aside time for it before the end of the year.
Having a proper budget can be the make or break for your company. I hope these five tips help you set up a smart solid budget for the next year and your business reaches the glorious heights it deserves.Good luck!
Have you built a budget for your company? Are there any other important tips that have helped you with budgeting? Or if you have any questions, feel free to comment below. I’d love to hear your inputs!