Money may not make the world go round, but it’s the lifeblood of your organization – whether you have been in business for many years or are a new e-commerce startup trying to stand out.
Without enough revenue, you can’t pay employees who make your business function, buy fresh stock, or keep the lights on. But you shouldn’t roll the dice on your company’s financial stability: you need a solid budget plan.
Without a budget, everything your organization does is a complete gamble. And there’s no such thing as a completely safe bet. But, if you want the best odds, you need to plan your spending. You need to know how much money you have, and whether you’re operating at a profit or a loss.
In this guide, we’ll discuss the importance of a budget and provide you with some actionable tips on how to build a budget from scratch.
Why is budgeting so important?
From setting up benefit and bonus plans for your employees to adjusting stock levels and streamlining your operations with Voice over Internet Protocol (VoIP) solutions, having a budget is paramount for any business.
Knowing how to build a budget will help you:
- Make predictions about future costs
- Achieve business growth
- Monitor your organization’s financial health
- Establish and achieve long-term goals
- Make the most of profitable opportunities
- Weather economic hardship (such as a recession).
Even though it seems like basic sense, not every business has a formal budget. A study by Clutch found that only 54% of organizations had a budget in place for 2021. So, for the past couple of years, almost half of businesses have been operating by the seat of their pants.
The eight steps of building a budget
The first time creating an organizational budget can be a little intimidating. There are a lot of moving parts to consider.
The right Financial Planning and Analysis software (FP&A) software can make life much easier. But you still need a working knowledge of how to build a budget plan – let’s take a look at this in more detail.
1) Review Financial Records From Previous Years
Reviewing old financial records – such as invoices, revenue reports, and tax returns – can be a great way to get your bearings. They’re a goldmine of financial information that can provide context and financial reporting software will help you automate, keep track of, and report, everything from the finance department.
However, you can’t expect next year to be just like the one before it. So, reviewing several years of records can give you a range of expectations to work with. But remember to account for inflation the further back you go.
2) Look at Your Existing Revenue Streams
Now, you’ll need to look at your company’s revenue. In other words, all the money your company makes before you subtract costs.
Next, you need to separate that revenue into individual streams. What those might be depends entirely on the kind of business you run. For a chain of stores, it would be their physical locations across the country. But an online business would have revenue streams like:
- Products or merchandise
- Services and subscriptions
- Ad banner revenue
Knowing the most profitable elements of your business is essential for sound decision-making.
3) Compile Your Fixed Costs
Before you get too excited counting gross revenue, remember you still have to make deductions. Start with the most predictable costs, such as:
- Employee wage expenses
- Workspace costs (such as rent for an office or store)
- Annual fees for your company’s web domain name
- Tax payments
4) Estimate Variable Costs
This next step is a bit more complicated, since it involves making a prediction. There are all kinds of variable costs that can change month-to-month, or even week-to-week. This is where reviewing records from previous years can save you a huge headache.
Some examples of variable business costs include:
- Utilities for office spaces (gas, electricity, etc)
- Sick pay and lost productivity
- Employees requesting payment on demand
- Tax increases
- Broken equipment
- Damaged or spoiled stock
There are always bound to be some unpredictable expenses throughout the business year: leave yourself some budgetary wiggle room to deal with them. Even having an amazing financial year can sting you with a bigger tax bill as a result of higher profit.
5) Create a Profit/Loss Statement
Now, you should have all this information stored in your general ledger and be ready to put together a profit/loss statement. As the name suggests, your statement will summarize whether you’ve made a net profit or loss: it’s the simplest indicator of which areas of your business are thriving or struggling.
Your statement should indicate whether each revenue stream in your business is making or losing money overall. You’ll need to consider everything: your departments, services, products, and so on.
This is an essential part of how to build a budget for your organization because it helps you conduct an overall budgetary health check.
6) Forecast Future Investment
How you invest profit can determine the future of the company. Are you opening more locations? Introducing new products or services? How about updating the tools your employees use to do their jobs? It’s one of the trickiest parts of how to build a budget.
There are lots of things you can do to identify investment opportunities. Monitor SEO, survey people, and look at what your competitors are doing. Here’s an example of what a thought-out investment might look like:
Say you’re running a B2B tech company. You notice a hypothetical uptick in people searching for call dialers, a type of software that can help call centers automate the dialing process to customer phone numbers. That gives you the bright idea to start offering an auto-dialer service to your clients. Not only does this cater to an identified market, it also allows you to develop something you may be able to use in your own business.
7) Consider Your Growth Trajectory
It’s important to consider how your business can grow by looking at potential investment opportunities and factoring them into your budget. These opportunities, in fact, are only possible if you have the revenue to achieve and sustain them.
For example, many companies are taking advantage of the popularity of hybrid and remote work to tap into exceptional global talent. If that’s one of your goals, you may need to invest in specific hiring platforms, payroll tools, and remote access solutions.
All these come with their own cost, which you’ll need to include in your budget plan.
8) Assign Budgets to Goals and Departments
As a final step, you’ll need to assign budgets to the different parts of your business. This is of paramount importance, as it helps your selected leaders to operate more autonomously.
To support them with their decisions, you’ll also need to conduct budgetary reviews. For instance, your head of HR may want to implement an employee payroll software, your call center manager may choose to invest in a solution from Vonage, or your finance team may want to automate processes with Datarails.
These can all provide myriad benefits, making each department more productive and efficient. But you’ll need to consider the costs associated with each, especially if there are ongoing renewal fees.
This also applies to any projects you’re running. It’s about providing autonomy while also preventing accidental overspending by setting expectations ahead of time.
Making the most of your budget
Now that you’ve comprehensively reviewed your chart of accounts and planned your budget, you’re all set. But don’t forget that even good plans go awry. So, let’s conclude with a couple of last-minute pointers.
Conduct Regular Reviews
Overspending can be the kind of thing that creeps up slowly. For this reason, you’ll want to keep reviewing your budget regularly, at least every quarter or, better yet, every month.
Clearly Communicate Your Budget
To make sure that your hard work putting together a solid budget pays off, you’ll need to keep people informed. Your organization’s leadership needs to know how much they’re working with. Of course, you’ll cover this as part of your departmental budgeting, but you also need to keep all the relevant people in the loop during ongoing reviews, too.
Plan for Financial Emergencies
Things often happen beyond our control. Consider how you’d adjust your budget in the face of something going wrong, such as sudden, massive profit loss, or unforeseen legal trouble for the business. You may also want to assess how you’d cope financially in the event of an unpredicted societal event, like another pandemic.
Playing out the hypothetical can help you to financially prepare for the worst, even if you never have to put it into practice. You can rest easy, knowing your organization can keep itself stable in the face of adversity.
Ready to build your budget from scratch?
Knowing how to build a budget from scratch enables you to provide stability for yourself, your employees, and your investors – not to mention all the customers and clients who may have come to rely on your brand.
Hopefully, our eight steps have given you a clearer idea of what goes into a budget. Just remember to take your time, especially while gathering your financial information. And, once you put your plan into action, be ready to tackle any “surprises” along the way.