Successful business owners don’t simply prepare a budget and then put it on a shelf in their office; they use it frequently to manage their business and adjust it as necessary when conditions warrant. Annual budgeting and monthly budget review should be a part of every small business’s management process.
A budget is a financial plan of income, expenses, and profits. The most ideal type of budget rolls forward on a 12-month cycle. If you start it in May, your budget goes 12 months into the future. Each month during budget review, you assess your current position and budget one more month in the future. Using a rolling 12-month budget allows you to always see 12 months into the future and take into account revenue and expense trends that appear during the year.
If your business is established and uses a robust bookkeeping system such as QuickBooks, you can easily create a budget within your accounting system. Good accounting software allows you to establish a budget based on the historical information in its system. From that point, management must use current information to make educated guesses and adjustments about budget items that may change during the next 12 months. Accounting systems can print a comparison report that allows you to compare month-to-date and year-to-date vs. last year’s month-to-date and last year’s year-to-date. They also allow you to view your performance graphically in various ways.
As you plan your budget, consider the strategic and tactical goals you’ve set to increase your revenue, reduce expenses, or improve your business’s key performance indicators. The following are examples:
- If your business has several slow months during the year, plan well in advance to take steps to increase revenue during those months.
- Using your budget, determine your estimated break-even point for each month of the year. Consider ways to reduce costs and increase revenue for each month but particularly when you anticipate a month that is going to be in the red. One of your goals might be to make every month profitable. See Creating a Break-Even Analysis.
- If you are in a seasonal industry, budgeting is even more important because you have to generate enough sales during the peak season to cover your business expenses the rest of the year.
- Spend several hours each month reviewing your previous month’s performance and plan for the next 12 months. This is time well spent. Include your company’s management and key employees in this process, as they often contribute good ideas that will help your company exceed goals.
- Hold key managers responsible for their portion of the budget.
- When something is not working as you planned in your budget, work hard to design a solution or alternate source of revenue. This constant process of thinking about where your business is and where it is headed is very important.
- Don’t forget to budget capital equipment purchases as appropriate. You will need to plan how you are going to finance equipment, come up with the downpayment funds, and plan for your monthly lease or note payment.
The process of budgeting does not come easy at first to many business owners, but once you have good data in your accounting system and go through the process for several months, it will become easier, take less time, and pay off in higher revenue, lower cost, and higher profit.
Sam Thacker is a partner in Austin, Texas–based Business Finance Solutions.