Strong financial planning is a pillar of any successful business, no matter your size or growth stage. If you think your finances are in order without having devised a budget, there may be plenty of missed opportunities to be had from doing so.
Perhaps there’s a reason why you’ve not come around to budgeting for your business. Time, effort, lack of perceived importance, or a simple lack of know-how.
All of these are fine excuses, however, all are easily hurdled if you set your mind to it.
This blog will examine the importance of budgeting, the steps to an effective budget, how to tailor one to your business, the types of budget, and maybe a little inspiration to get you going. As a business that began from scratch in 2009, to now running three growing agencies across Texas, Integrate Agency knows the importance of financial planning and has reaped its rewards.
Now, we hope to share our experience with you and allow like-minded businesses to grow as we’ve grown, to succeed as we’ve succeeded.
Budget vs Forecast
To run a functional business, you’ll need to develop a budget as well as forecast your long-term business goals and outcomes.
Put simply, a budget is your business’s financial goals and a forecast depicts whether you’ll be able to achieve them. Without a budget, your forecast may never eventuate. Without a forecast, however, your budget remains static and only functions to keep the business afloat in the short- to medium-term. Both are important, but for the purposes of this blog, we will continue to focus on the goal-setting aspect of your finances.
Why Build a Budget?
Without putting effort into financial planning, the other facets of your business become at risk of underperforming. It may not be obvious without further inspection, but these facets could be vastly uplifted with some extra funding. Conversely, a business area could even be overfunded without anyone realizing it, requiring the management of unnecessary assets.
A budget balances out your cash flow and delegates dollars to areas that need it most.
Just ask the 54% of small businesses that had an officially documented budget in 2021, according to a report from Clutch. If you think this figure is startlingly low, don’t worry, we do too. This means almost 1 in 2 businesses had less than full visibility over their own finances!
That’s 54% who could confidently set business goals, make good business decisions, and get finance from brokers. It’s 54% who invested in the future of their company, brought everyone on the same page, and who were honest with their position compared to what they wanted to achieve.
Unfortunately, not every budget is a good one, with at least 46% who weren’t totally in control of their funds, who were too busy to set things straight, and who may not have reached their potential in 2021.
There were roughly 3 million small businesses in Texas during 2021, according to the U.S. Small Business Administration. This accounted for 99.8% of all businesses, and employed 4.9 million people.
Now, according to Clutch, that amounts to roughly 2.3 million Texans working for a small business with no official budget – with no sure way to maintain the profits required to pay loans, bills, and salaries. Without raising any alarms too loudly, this shirking of financial responsibility puts employees and the wider business at some risk – something no good owner or executive would want to do.
So, why not build a budget?
How to Build a Budget
Your simple answer to the above question may be that you don’t know how to. This is a reasonable and acceptable response, as not everyone business owner was afforded the opportunity to learn the intricacies of financial planning. However, with great business comes great responsibility.
The very fact that you now own, run, or play a big part in your business means it’s up to you to learn about and encourage implementing an official budget. In this case, building a budget is less a series of steps as it is a list of checkboxes.
You’ll need to calculate a series of things which will accumulate in a more thorough understanding of how your finances flow throughout your business.
Who knows, as you audit each area of the business, you may learn something about an area you’d never paid much attention to. The things you’ll need to list are your revenue, fixed expenses, variable expenses, and your one-off expenses. Once you have these, you can calculate your overall cash flow and your profit – that coveted P-word.
Profit is the big ticket that will open doors to company-wide improvement and assure you that business is indeed booming. If you conduct a financial audit and find that your cash flow is in the red and that you’re losing money, then you should feel relieved that you committed to a budget sooner rather than later. Only once you’ve realized the holes in your financial planning can you begin to patch them.
If you’re unsure of some of the terms mentioned above, a credible budget calculator should help to define them and guide you in identifying them within your business.
Fixed expenses, for example, could be things like rent, salaries, and bills, while variable costs will relate to your production volume such as cost of inventory, and packaging. These are far from exhaustive lists, however, and you should take care to account for every dollar that comes in and out of your business.
Budgeting for Different Businesses
Not every budget will look the same and this largely depends on the type of business you run.
When a startup business first approaches its financial planning, for example, it will be hard to calculate things like cash flow without any meaningful data to draw from. This is where market research is required to take educated guesses at the values you expect to earn and spend. Things like rent can be easy to research, while market demand for your product can be more abstract. So, the more research you conduct, the better.
Seasonally successful businesses will face different hurdles altogether as their cash flow won’t be as consistent as others. This requires an attentive kind of financial planning, where enough funds are stored for the quiet periods to maintain essential business functions.
Make sure to consult a financial advisor who can determine what your budget might look like based on your type of business.
Types of Budget
Perhaps you don’t have the time to create a budget for your entire company. There is still opportunity to do so for certain business areas. Again, the different types of budget will be more or less applicable to different types of business. Also, the following types do have some crossover in their application. Nonetheless, consider starting with one or multiple of the below budget types to kick-off your financial planning.
Master budget
To save repeating information, this is as it sounds – a master plan of the entire company’s expenses, revenue, sales, operating costs, and capital expenditure. Many companies start big before they departmentalize their budget, but your business may call for the reverse. This often combines the inputs of an operating budget and a financial budget.
Operating budget
This encompasses all of the day-to-day expenses and revenue of a business, while disregarding capital expenditures and long-term debt. This helps in making short-term decisions to improve efficiency by simply focusing on daily revenue, expenses, and profits.
Financial budget
Unlike an operating budget, a financial budget looks across the long-term, considering cash, capital expenditure, and your overall balance sheet. All of your business’s assets, liabilities, and stakeholder equity will be considered by a financial budget.
Budget with Confidence
We hope this has given you the inspiration and knowledge to go forth and compile a budget worth bragging about.
Your business is sure to benefit from some sturdy financial planning, just as Integrate Agency has done for over a decade.