Many new businesses wonder: “How do we start?” or “How can we create a great budget and stick to it?”
Using a budget is a key component in driving your organization’s financial future! A good budget will have a great impact on your overall operations, so I’m sharing 10 tips that will help your business build an effective financial plan.
Tip 1: You must understand what a budget is
A budget is not meant to manage every penny spent. It is simply a guide to assist you in making better spending decisions, and it can be an eye-opening tool when you begin to track where money is being spent. It will teach how to manage that money in the best possible way.
When creating a budget, mindset is everything. If you come in with a negative attitude about budgeting, the chances of creating a good budget are probably slim to none. Instead of seeing it as a burden or an annoying task, consider creating a budget on a positive note, seeing that it is a helpful business tool.
There are also different types of budgets. Regardless of which budget type you choose, everyone in your company needs to be on the same page when it comes to the budget’s overall goals.
Tip 2: Know your company like the back of your hand
I’ve said it before and I’ll say it again, it is imperative to understand the risks associated with your company and its industry. For example, if you operate in an industry that is significantly seasonal in nature, you will likely need to break down an annual budget into a quarterly, or even monthly, approach.
Before diving into the creation of your budget, you should be aware of pending changes in regulations, such as overtime rules, health care changes and the new tax law. You should also compare your organization to industry standards using your CPA’s tools and resources. Obviously, your organization is not exactly like every other one in your industry, but if you can identify areas where your results vary significantly (and the reasons for those variations), you can make better decisions about spending.
Overall, it’s a good idea to identify the most substantial threats to productivity within your organization and its financial impact.
Tip 3: Build An Excellent Budgeting Team
It’s very important to build the right team to help create your budget. It should not be left to one person to build the budget. If certain employees are going to be held accountable for the budget, then they should have some influence on its creation.
While you should typically restrict budget creation to members of management, it’s okay to think outside of the box and involve other individuals who can bring fresh perspectives to the table. For example, a clinical supervisor or line-level may be able to identify when assessments need to be updated or new curriculums needed or overhauled. And who better to predict what stimuli and reinforcers than those delivering services every day in the field.
Tip 4: Be Realistic
You should develop your budget based on past results and future projections. Employees will likely scoff and dismiss unrealistic budgets as unattainable and each month-end will likely feel disappointing. Analyze financial results from the last five years as a starting point. What are some costs that are fixed and inevitable? Those are always entered first. Then you can look at accounts or line items that have fluctuated more drastically over the years. What caused this fluctuation? How many were one-time expenses? Can these irregular spendings be controlled? Using past information and adjusting for predicted random spending deviations helps provide more stability when establishing budget numbers.
Tip 5: Think Preservation
Have you ever heard the saying, “You don’t know what you don’t know, but you know that you don’t know something.” In other words, there is always some unexpected element of a project. If we knew all of a project’s anticipated costs and factors, it wouldn’t be a “project”.
It’s up to you how you factor in unknown elements, whether it’s by having a line item in your budget for certain contingencies or rounding up each individual line item.
Consider planning for future years. Economic downturns are inevitable, so in a strong economic year, you should not only create a balanced budget but also start building up a cushion for the anticipated hard times to help eliminate the panic.
Tip 6: Flexibility Is Key
Your budget should be modified throughout the year! Revisiting your budget is a very healthy exercise for your company’s well-being. If you wait until the end of the year to assess the actual results to the budget, you will be way behind the curve.
If you find certain line items that are in danger of going over budget, look for other line items that are coming in below budget and borrow from those items to maintain the same bottom-line goal you started the year with.
Tip 7: Get Detailed Oriented
It’s all in the details. Obviously, you don’t want to have a separate line item for each check you write, that would become irritating and extraneous. However, the more detailed you can get, the better. And that all begins with tracking expenses as stated in your chart of accounts.
Some questions to ask yourself when it comes to your trial balance are:
Is it time for a fresh look?
Should some things be grouped together?
Are some line items really housing several different types of measurable expenses?
Some organizations may be fine with a line item called “payroll.” But other organizations need to break that down by division or employee position type. Similarly, instead of having a line item for “employee benefits,” it may be more beneficial to have a line item for each type of employee benefit (health insurance, retirement benefits, sick and vacation pay and tuition reimbursement).
Having such a black and white system will help ease the pain when it comes time to analyze why line items were not quite lining up with the budget.
Tip 8: Correlating Budget Relationships
Sometimes you must change a few line items in your budget for it all to make sense. It’s like buying a toy and batteries are not included!
Be careful when changing one line item of your budget without analyzing how it affects other line items. For example, if you find out that you are going to hire more employees, instead of simply increasing the payroll line item by 10%, you will want to increase employee benefits, payroll taxes and other items directly related to payroll.
Similarly, if you think you can just bump up your bottom line by increasing sales by 10%, don’t forget to also increase variable costs related to sales (costs of services provided, commissions, taxes, and freight).
Tip 9: Utilize The Best Accounting Software
Most accounting software has a built-in budgeting tool, so if you’ve become frustrated with your Excel budget, check whether your current software has a tool you could utilize to assist so you can focus on having it all in one place.
We hope this will lead to increased efficiency since you can link your results to prior years and analyze the current-year budget with a simple click of a button. Let your software do the work for you!
Tip 10: Share Your Secrets
Your company’s budget doesn’t have to be kept hush-hush. Obviously there are some instances when certain financial information should be kept to a limited group, organizations will find that increasing who the budget is shared with will lead to greater transparency, increased feedback, and beneficial communication.
Your budget can be used as an incentive for employees to increase their division’s productivity and limit spending. By using the budget as a tool, your organization can create a friendly competition between divisions and reward employees for reaching their goals!
The more you can empower and engage your employees, the better off your business will be. Know your organization inside and out, assemble the right team and share your budget with the right people.