Budgeting can be a complex challenge for any business. Whether you are just starting out, or your company is more established and planning major changes such as expanding into new markets, creating a business budget comes with several tough choices and strategic considerations. In order for SMBs to create a functional budget, they will need to envision what’s ahead of the curve and anticipate future needs as their company grows. Without clear financial goals and careful forecasting, it can be difficult to create a budget that can grow with your company.
Thinking through the following best practices will help you create a business budget that can meet your needs year over year.
1. Start with the Future in Mind
For new businesses who are just starting to consider these principles, it can be virtually impossible to have a crystal-clear financial vision in the beginning stages of your company. However, it is crucial that you consider the following questions to aid you in crafting a budget that allows room for growth.
Here are some provoking questions SMBs should ask in order to future-proof their business.
- What are you wanting your company to accomplish in the next calendar year, 3 years, or even 5 years from now?
- How many products will be launched this year?
- Are you wanting to scale up and grow the business, or are you comfortable with your current size?
- Are you planning on hiring more personnel?
- Will you be adding any new service offerings?
- Will there be any changes to your marketing strategy?
2. Don’t Forget to Pay Yourself
As the business owner, the vision that you establish impacts everything in your business, including what you need to prioritize. Many business owners try to solve problems on the fly without planning ahead. This can lead them to over-distribute money in areas they weren’t expecting, such as costly tech rollouts or new hires during product launches.
If you aren’t budgeting properly, how can you secure enough money left over to pay yourself a livable salary as a business owner? Many entrepreneurs pay themselves last but planning ahead ensures that both your business and your family have a future.
3. Budget for Growth
In order to grow your business, the budget should include a marketing line item that can expand over time. As the revenue grows, plan on reinvesting back into the business by increasing the budget allocated to marketing to spur new sales. This is growth funded growth. Plan on using a portion of your current growth to fund future growth.
Similarly, as you ramp up sales, your business may need to hire more personnel to facilitate this expansion. Personnel hires must be included in the budget. This requires you to have enough foresight to delineate between whether you will be hiring employees to help generate more sales growth, or whether you will need to quickly onboard new personnel to meet the rapid demand of increased sales.
Many SMBs quickly forget that when they earn more, they owe more. Taxes increase as you climb higher up the revenue food chain. Strategically growing your business means that you will also need to be equally strategic about setting money aside to account for the increase in tax liabilities.
4. Understand Owner Personalities
Every business owner is different when it comes to determining what a comfortable cash cushion amount looks like. Some prioritize a minimal cash cushion, such as 8 weeks. While others adopt a more conservative safety net with a 6-month cash cushion. Whichever personality camp you fall into, just know that the more you reinvest back into your business, the higher the amount of risk you assume.
Keep in mind, lack of cash is the single biggest reason SMBs go out of business. If you don’t have cash, you can’t go forward. Remember, you don’t have to have all the cash yourself. You can also maintain it through investment, or loans. You just have to have the ability to obtain cash when your business needs it.
5. Create a Hybridized Budget
There are two main types of budgets that businesses can adapt quickly and easily: historical and zero-based budgets. Historical budgets involve rolling over your Profit & Loss Statement from the prior year to use as a historical benchmark for estimating expenses. Zero-Based budgeting is a mental exercise where you start with “$0” for every expense category and then justify each expense before adding it back into your budget.
Most companies are best served from a hybridized combination of these approaches. Using the historical budget allows you to understand where your business was last year, this added perspective allows you to take a pause and reevaluate. Pairing this historical framework with strategic questions using the zero-based budget philosophy can also be helpful. Ask questions like, “do we need to reevaluate our marketing plan?” Or, “do we need every software expense on our list, or can we cut some?” This type of hybridized approach allows you to understand which of your expenses are necessary value-added expenses and which are discretionary.
Tentho Can Help
Tentho’s highly skilled financial experts excel in helping clients plan for their financial futures. Tentho works with clients to create a sustainable, long-term approach to money management, investing, and financial planning. Their capable team of financial experts is ready to answer any budgeting questions you may have and are happy to pass along their expert industry-leading knowledge to you. If you are ready for a dedicated financial team to help you navigate your business finances in 2021 and beyond, sign up today or schedule your free consultation.