Building Out a Business Budget Helps You Manage Stress
A business without a budget is like a novice bowler not using the bumpers – you’re more than likely going hit the gutter at some point. And while legends like Roy Buckley (RIP) who’ve had plenty of practice, can score a perfect 300 with wide open lanes – no matter how long you run your business, you’re always going to need those bumpers. If you want to be able to sleep soundly at night knowing your business has liquidity, you’re going to need a budget.
The best advice we can give is that once you create a budget, stick with it. It doesn’t have to be set in stone, but having a general framework will not only help you plan for the future, you’ll also have a valuable tool for analyzing your expenses and can change direction when needed. Otherwise you may end up with more debt and financial burdens than you had anticipated.
Since markets – and today’s business landscape as a whole – are always changing, your budget has to be a living document that you can update regularly in order to reflect the current circumstances that will affect your business.
Here are the key factors to keep in mind when planning it out:
- Fixed costs
- Variable costs
- One-time costs
- Cash flow statement
As mentioned earlier, it is best to build out a flexible budget so you can anticipate any potential changes, good or bad, that may impact your financial growth. However, flexible budgeting isn’t perfect and it may have a bit of a learning curve as it requires constant monitoring and tweaking. And like with most things, there are no guarantees.
Here are some of the pros and cons that come with building out a flexible budget:
- Allows your business to address unpredictable scenarios, like market fluctuations or a real-time emergency
- Less rigid resource allocation
- Allows your business to pursue new opportunities while minimizing potential risks
- Better control of costs
- Time consuming/ requires a lot of oversight and maintenance
- Limits your ability to plan in some areas when your budget changes
- Your financial predictions change more often and so have a shorter lifespan (months as opposed to quarters)
- Less accountability when it comes to sticking to your original budget
So How Do You Implement a Flexible Budget?
Whether you are switching to a flexible budgeting process from a static model or starting from scratch, there are a few key steps you can take to propel your business toward success.
First, you want to figure out your fixed and variable costs. Your fixed costs are expenses that rarely, if ever, change, like rent or lease payments, insurance and other set predictable expenditures for your business. Variable costs are prone to change based on your business’ output. This usually refers to raw materials and distribution expenses.
Some expenses will have both fixed and variable characteristics. These are usually referred to as “semi-variable” or “semi-fixed.” Once you identify fixed and variable costs, you’ll have to separate them out on a budget sheet.
Creating a Flexible Budget
For a better deep-dive on how you can build out a flexible budget, these following steps should make the process easier to follow:
1. Identify which costs are variable and which costs are fixed
Fixed costs typically include expenses, such as rent and monthly marketing costs. Once you have determined which costs are fixed and which are variable, separate them on your budget sheet.
2. Divide the budget
Divide the budget you plan on spending on variable costs by your estimated production. This will provide a starting budget for cost per unit.
3. Create your budget with set fixed costs
Create your budget with set fixed costs that will not change and variable costs depicted as percentages that can be adjusted based on actual revenue.
4. Update the budget
Once an accounting period has ended, update your budget with the actual revenue or activity measurements. That way your budget can adjust the variable costs based on accurate data from the accounting period.
5. Input and compare
Input the final flexible budget from an accounting period into your accounting software to compare it to the expenses you initially anticipated.
Best Practices to Follow
Creating any kind of budget, even if it isn’t constantly adjusting, can be an overwhelming task – and it’s on the never-ending checklist of things to do for most business owners. But trust me, it’s worth the effort. Just remember that cash is what keeps your business up and running, and allocating it efficiently is essential to your success.
For your own benefit, check out these best practices and keep them in mind:
Just get started: Creating a budget can be scary at first, but it’s so much better for your business to just get it started. And don’t worry – you’re going to be pretty bad at it the first time around. Luckily, with each new quarter (or year) you’ll learn new things and get better at it.
Practice makes perfect – or close enough: Trying to make everything perfect is what usually leads to procrastination. Don’t let that affect your budgeting process. Just keep at it.
Don’t overcomplicate it: It’s easy to get lost in the details, so keep the first page in your budget high level. Nosediving into every little detail usually has very little to do with the evolution of your budget or the financial health of your business. If you start simple, it makes it easier to drill down into further layers of complexity.
Creating any type of budget, whether it’s static or flexible, is the perfect way to help keep your finances on track and driving toward a healthy and sustainable business and if you need more info, contact the Dryrun team today at email@example.com for a discussion and quick walkthrough of what your business could look like.
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