Do the words “budget planning” make you groan? For many people, it’s on par with being stuck on a cross-country flight next to a screaming baby. Or calling [insert company you dislike most here]’s customer service line.
It doesn’t have to be that way. Budget planning is not all about limitations. In fact, budget planning can be freeing! As John Maxwell said, “A budget is telling your money where to go instead of wondering where it went.”
You control your budget. Your budget does not control you.
Budget planning is undoubtedly a key component of your small business’s financial success. Therefore in this article, we’ll discuss the importance and benefits of small business budget planning.
1 | Clear Goals and Strategies to Plan Your Budget
Planning a budget for your business provides you with an opportunity to plan strategically for the year ahead. The first step in budget planning is identifying your financial goals. What do you want to achieve?
Here are a few common small business financial goals, with links to get you started on some of these right now:
- increase revenue
- launch new products or services
- reopen your business, and start again strong!
- invest strategically in marketing support to grow your business
- increase the amount of cash on hand/cash flow
Goals should be SMART: Specific, Measurable, Achievable, Realistic, and Timely. An example of a SMART goal is: “Grow net operating profit by 10%, to $250,000 by the end of the year”
Next, consider how exactly you’re going to achieve your goals. For example, if you want to increase revenue, what specifically do you need to do to make it happen?
- Do you need to hire more salespeople? (Use our new hire cost calculator!)
- Spend more on research and development to launch a new product?
- Engage a marketing agency to increase brand awareness?
As you work through this process, don’t lose sight of any constraints on your resources. Most businesses do not have unlimited cash to spend. Therefore, you should allocate resources to the initiatives that are most impactful to your business. Prioritize your spending to get the most bang for your buck! GET HELP WITH YOUR BUDGET
2 | A Path to Greater Profit
Effective budget planning details anticipated income and expenses by month. It charts your path to greater profit. How?
Well, your budget should include detailed information about revenue by product and service. It should break down spending by account categories, such as professional services, software, and employee compensation. Need a budget template to get started? Download Momentum CFO’s budget template for free!
In addition, it’s a good idea to document supporting details for those account categories as needed. Your budget may include additional schedules that show compensation costs by employee, or the components of spending specific marketing initiatives.
That way, when you refer to your budget, you’re not just looking at one big number, trying to remember how you came up with it. Instead, you’ll be able to review the details of your spending.
Net profit (your “bottom line”) essentially equals revenue minus the cost of goods sold and all other expenses. After you’ve completed your budget planning, you’ll have a custom-made plan to achieve your profit goals.
3 | A Way to Measure Financial Performance
Another benefit of budget planning is that it gives you a way to measure your small business’s financial performance. Businesses become and stay profitable with careful financial management. Therefore, analyzing variances between your actual financial results and your budget (a process known as “variance analysis”) keeps you on track to achieve your financial goals.
Review variances between the two sets of numbers each month so you can identify where you may be getting off track from your budget. For example, if you find that sales are $50,000 lower than you expected in the first quarter, you’ll need to cut expenses by the same amount to achieve the profit goal you set. Don’t put off this important task. If you procrastinate, by the time you’ve identified a problem, it may be too late to solve it.
Don’t have the time or inclination to do complete variance analysis yourself? As part of our CFO Services, Momentum CFO can analyze your financial results each month. We will deliver them to you in easy-to-understand financial dashboards. All of your critical financial information will be at your fingertips!
In addition, we can provide you with analysis and customized financial recommendations that don’t take a degree in finance to understand.
4 | Confidence About Financial Decisions
Budget planning gives you greater confidence about making financial decisions. Here’s why:
- You have already set your goals and developed strategies to achieve them
- You’ve determined how much you’re going to spend
- You know what you’re going to spend it on
By planning out your budget for the year, it takes a lot of the guesswork out of how to manage your business’s finances. That makes it much easier to decide whether you should sign that contract, make a big purchase, or hire a new employee!
Ideally, you should share your budget plan with your leadership team. You and your staff should be on the same page, working towards the same goals. Stick to your plan as much as possible and you’ll be on your way to a great year!
Budget Planning: The Bottom Line
As Dale Carnegie said, “An hour of planning can save you ten hours of doing.” Take the time now to plan for the next year. By doing so, it will help you set the strategic financial direction of your business and provide a path to greater profitability. Budget planning provides a way to measure financial performance, course correct as needed, and feel confident about your financial decisions.
Need help? You don’t have to tackle budgeting on your own. Download our budget template to get started today! Then, let Momentum CFO do the heavy lifting for you. Schedule a free consultation to learn how we can help you plan for financial success in the year to come!