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 THE BASICS OF BUDGETING 



Developing and managing budgets can sometimes be a sizeable task for companies. Without budgets, it might be harder to know how your business is doing. And, you may not be able to optimally plan for your business's future. If you are budgeting by memory or worrying about payroll from week to week, you may be putting your company in danger.

Budgets can be a living, breathing part of a successful business if you plan them precisely and revisit them frequently. Use them as a map for the future, as well as a financial journal describing in detail where you have been.


BUDGET COMPONENTS

There are three essential components of any budget:

  • Sales and other revenues

  • Total costs and expenses

  • Profits

Here’s a look at each in more detail.

  • Sales and other revenues

    The more accurate you are with your revenue estimates, the easier your next year’s finances will likely be. Be conservative as you check over last year’s revenue and evaluate the current economy and the situation of your business.

    If you are a startup, look at the financial health and growth of others in your industry, use your experience, and conduct market research. If you are an established business, use the prior year as a base but adjust for current projections and marketplace conditions.


  • Total costs and expenses

    Next, calculate your total costs of doing business, which includes identifying fixed, variable and semi-variable expenses.

    Fixed: This includes fixed costs, such as rent, leased items like electronics, heavy equipment, furniture, and insurance.

    Variable costs: These expenses change based on sales. These include raw materials for manufacturing, freight costs and inventory.

    Semi-variable: Salaries, advertising and telecommunications are typical examples.


  • Profits

    This is why you are in business. Profit boils down to a pretty simple formula.

    Sales - total cost = profit

    If you are a startup, benchmark your profit levels against others in your industry by checking with peers in your field and conducting market research.

    Without a good handle on what your profits will be from year to year, it will be difficult to plan for future years. New equipment purchases, a move to a larger location, and the raises and bonuses due to your employees will all be dependent on understanding the profit position of your company.


BUDGET OUTLINES

The goal of identifying a budget outline is twofold. It helps you to find and organize information. A framework that is appropriate for your business will help enable you to develop a budget with precise costs and income. Use the same outline from year to year to understand your prior years and help you plan for the next ones.

Try incorporating these tips when preparing the budget outline for your business.

  • Check trade journals and associations to find current industry standards and estimates. The internet and the library are great places to start..

  • Utilize a budget spreadsheet that will help you figure out how much you need to allocate for raw materials, rent, taxes, insurance and other expenses.

  • Consult with your suppliers if you work in a volatile market.

  • Plan it out, month by month, for the calendar year. In addition, include a longer-range version that covers outer years on a quarter-by-quarter basis. This could be helpful for financial statement reporting.

  • Check over your budget and look for areas where you can cut expenses. Look for new suppliers with lower costs. Ask your insurance agent how you can lower your premiums. When you see all the numbers in front of you, in the context of the overall budget, some expenses will stand out as too high. This might be the time to look for better deals.


BUDGETING BASICS AND BEST PRACTICES

There are a number of budgeting best practices you can follow:

  • Put your budget together during the last two months of the year. This will help allow enough time for research, double-checking figures, and discussion. If you prepare your budget too early, your numbers might not be accurate enough. If you do it too late, you might not have time to make needed adjustments.

  • Update your budget each month, with the help of managers and your accountant. Factor in how well you did for the month and what your expenses were. Look at probable sales for the coming month. Be sure to take note of any upcoming expenses that you did not anticipate.

  • Make changes like altering your staffing schedule to match market conditions. Try different actions that can help your bottom line. Perhaps you can speed up payment from clients as a way to improve cash flow.

  • Link performance bonuses for your staff directly to the budget. This gives each eligible person a reason to keep the needs of the business front and center when making decisions during the month.

  • Adjust the budget and account for changes you hadn’t anticipated. If a significant client cuts back on its orders, or if a supplier suddenly has a slowdown in deliveries, you may need to act quickly to keep your budget in equilibrium. In other words, just like your business, your budget isn’t static.

  • Always check your budget before making a significant expenditure. One of the most helpful aspects of an up-to-date budget is reducing risk. It will tell you if you can afford to buy a new piece of machinery or sign a lease.

Every company needs to spend time developing and updating its budget throughout the year. Your investors and lenders will want to review it if you are looking for an infusion of capital. Your budget helps you to manage cash flow and keep up with payments to employees, vendors and suppliers. Most importantly, it can help you plan — and realize — future growth and profits.

If you’re interested in learning what we can do for your business, contact a Relationship Manager at a branch near you to discuss your business needs and the solutions BancorpSouth can offer.


© Fintactix, LLC 2020