Every business runs on money. It’s the fuel that drives a lot of things in a business. However, as much as anyone would like it not to be so, financial resources are finite — there’s ALWAYS only so much to go around. So smart and successful companies create a budget — one that’s efficient and effective, and one that strikes a balance between achieving profitability and maintaining and/or improving quality.
Why budgeting is important
And budgeting is not as easy as putting X amount of money on Item A and Y amount of money on Item B. There are a lot of different factors to consider. It’s fairly common for companies to be well-versed in the actual trade (let’s say IT or marketing, for example), but be lacking when it comes to bookkeeping and budgeting. And that’s important, because it’s the play between expenses and revenue that determines whether or not a business can continue to operate, or if it can afford to expand and grow. Without those two things, either a business runs itself to the ground because it spends more than it earns, or it falls behind because it cannot manage to grow and compete.
An Inc.com article says that budgets “minimize risk to a business”. Another article from Bond Street presents a great way of looking at how important a budget is. It not only makes financial management more efficient, but it also signifies a lot and can serve as a benchmark for you to measure growth. It makes you ask good, important questions such as:
- How does your growth or profit compare to that of your competitors?
- Were any changes to the original budget unexpected? Especially if these were negative, what steps in operations need to be done so something similar is prevented in the future?
- Are there any aspects of the budget that can be adjusted so that operations become more cost-effective without harming or compromising the quality of products and/or services?
- Does the benefit of a particular investment, such as upgraded marketing collaterals or IT software or infrastructure, offset the cost of such an investment?
Rosemary Peavler, in an article for The Balance Small Business, sums it up perfectly, calling a budget a “critical management toll and bellwether for the financial health of a company, identifying new investment opportunities, and measuring progress. In short, no business should be without a working budget.”
>> Recommended reading: What is Profitability Index and what to do with the calculation?
How to make a budget plan: Getting started
So, how does one go about making a budget plan? Here a few essential pointers for you consider every time you sit down and do your books.
1. Check the budgeting standard for your particular industry
The first thing you should do is to check what the standard is in your industry. If you’re a marketing company, try to learn how other marketing companies budget — looking at industry standards is best since you’ll have similar items on your budget like talent fees, advertising agency costs, third party suppliers like graphic artists or creative talents, and the like. You can better relate to how resources are allotted and make your own improvements and adjustments to suit the needs of your particular organization.
2. Make your spreadsheet
The next thing to do would be to canvass and make a spreadsheet. Contact any possible suppliers and compare their prices. An IT company for example, that needs new computers or equipment would be better off contacting multiple vendors to see which of them give the best value. Factor this into the spreadsheet and see if you top options are workable.
3. Create a buffer for unexpected expenses
The next thing you should remember to do is to factor in some allowances. Don’t be exact. More often than not, prices of goods or services change for one reason or another, and removing allowances for possible expenses can wreak havoc on your budgeting (not to mention your auditing). Plus, a lot of things are out of your hands so it’s best to have a buffer for any unexpected or unwarranted situations. This is especially true if you’re doing something new like expanding, hiring new people, changing locations, etc.
Also part of this is looking at your income streams and sources — weekly, monthly, quarterly, etc. — so you have an idea of how much you can have at a given time. This is especially important if your income changes based on certain seasons. Then compare that with your fixed costs and expenses.
4. Review and improve
Another essential when you want to know how to make a budget plan is to always, review things. Look at ways where costs can be cut (within reason) and operations can be slimmed down. In the way a buffer is preparation for unforeseen events that are out of your control, trimming and cutting costs involve looking at things you can control and maximizing the way they are utilized. A business will always have use for extra funds. Especially if you are a smaller or new business, reviewing your budget and constantly improving on it is one of the keys to further success down the road.
5. Make short and long-term projections
Especially if you are looking to hit targets or achieve certain goals, making short and long term projections in your budget can help you measure where you are versus where you want to be. Let’s say you’re a marketing company, look at your supplier costs — if you are just starting out, some of your needs might need to be outsourced, then you might then look at the cost of eventually establishing in-house staff to meet your needs.
>> Recommended reading: What is Management and How Does it Define Organizations?
Simple steps and pointers
Here are a few other general pointers on how to make a budget plan that works:
Track even the smallest expenses
Remember, small expenses do add up, in the end. So make sure log them all properly. An IT company, for example, might need seemingly mundane items like cables and such, but it always pays to track them. Besides the obvious reasons, tracking expenses like these can help you identify possible problems that would likely not have noticed otherwise. Keep receipts and other records of even the smallest transactions so you’ll have much better records. You can also opt to create a smaller “budget within a budget” like miscellaneous or discretionary funds, with you spending cash for smaller expenses so it doesn’t get tedious or nitpicky. Also make sure to accurately label all expenses, even the smallest ones.
One perfect example here is time tracking. More often than not, time isn’t really a big deal when it comes to budget planning. But time IS money, so tracking time employees spend at work is an essential part of looking at the budget. Look at things like setting fixed daily goals, task assignments, as well as setting time aside for the even more mundane but essential to-dos, like checking and responding to emails and such.
>> Recommended reading: Time is a critical factor in the service industry. Start measuring!
Update your budget frequently
When looking at how to make a budget plan that’s effective and efficient, you’ll need to update it fairly frequently. It’s up to you how often you want to do something like that, but you could miss out on something potentially significant to your operations if you don’t revisit and update your budget. You need to be flexible and open-minded to see if something needs to be changed at once, of if you need a little bit more time before implementing / executing a particular initiative or project.
Don’t count the chickens before they hatch
Simply put: Don’t spend what you don’t have. It’s important to work with what resources you have at hand. If you can avoid it, avoid getting into debt — which would be tempting, especially to a small IT or marketing firm, for example. Even guaranteed (but yet to be paid) payments would be better off not considered in a budget. If you are in debt, pay back the biggest one first.
Save, save, save
Remember that rainy day fund? You can draw that from any excess funds you managed to get from other items (like seeing if something can be trimmed or made more cost-effective). You can also opt to save for growth or other investments for your business.
Establish authority and accountability
Establishing who reports to whom and who is in-charge so you know who you’ll need to talk to if every something goes wrong. Learning how to make a budget plan would be pretty much useless if there’s no one who’s going to be held accountable as well.
Discipline is good, stingy is not
How to make a budget plan that works: It’s always best practice to be disciplined in spending. That means recognizing and accepting the certain costs associated with things — and being willing to spend that money. Being miserly, on the other hand, can hamper growth and have negative effects on your business, an IT company, for example, in a bid to keep costs down, buys poorly-made software or even tries to develop something in-house even though no one is qualified enough. This compromises quality and productivity, and you may even end up going over budget with all the unforeseen problems down the road.
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Utilize the right tools; partner with the right organizations
How to make a budget plan that’s effective and efficiency? Use the right tools. For example, Runrun.it, offers a unique service — among others — that allows you to better track and manage tasks. A well-planned budget makes it easier for a company to function properly, more so with a partner like Runrun.it that shares the same goals — which is to keep the professionals focused on planning and have the support they need. Runrun.it can help you organize costs and expenses, and make the necessary adjustments as you go along. Runrun.it makes budget management cost-effective in itself, and helps keep production at a maximum. Free trial here.
