3 Ways to Manage a Budget Efficiently
In a time of economic uncertainty, the need for an effective budget is more necessary than ever. Even in the best of times, building an efficient budget is intimidating enough.
It takes time to build a budget, and in the end, you should aim to create an organic file. This means, it should be able to grow with your business and its needs; fit into the economy’s status and meet market conditions.
Here are some tips on how to create and stick with your budget so you can avoid a trial-and-error way of learning.
What should be in a small business budget?
A budget is a financial tool, usually applied within a defined period that is by quarter, biannual, or annual time frame.
A small business usually includes:
· Expected sales to cover your business costs
· Identify the amount you want to put back into your business.
· Set a goal to hit to determine when you can hire extra staff.
How to create a budget
There is no one formula for creating a budget. It often requires the consideration of specific business conditions. But these steps will help you start.
First, Look back to past years for information. Three to four years of historical data will allow you to see trends such as seasonal peaks and expense fluctuations. This set of information will allow you to create a more accurate and true budget.
After you have gathered the appropriate data, you can now approximate sales and set profit goals. Make connections between the sales and the expenses to close the gap between estimates and actual numbers. While these predictions won’t be perfect, starting at a reasonable estimate will allow you to build and eventually create the most precise budget.
Next, identify fixed and variable costs and determine which of these expenses the business can’t survive without.
When you are ready, pre-determined profit margin. Profit margin is a profitability ratio calculated with net income divided by revenue. By calculating this, before starting the year, you will know where you want to be by the end of it. Everything else, you can adjust accordingly.
Tips to maintain your budget
Consider enrolling in financing and budgeting courses. Whether you are a new start-up or a seasoned entrepreneur, there is always something new to learn. In a digital age when you can connect with literally just about anyone, you are exposed to a limitless pool of talent and experience. It’s just waiting for you to tap it.
Make it personal. Manage the budget as if it is your own. It’s crucial to stay on top of your expenses.
Manage your expenses and adjust accordingly. When you are starting a new venture, everything looks exciting and the desire to start on projects will be overwhelming. But the key to every venture is planning and smart patience. This is where it is important to break your big plans into small achievable chunks that are doable in a realistic time frame. Planning is important so you know when you need to spend and when you need to save.
When you’ve determined the expenses you are willing to spend, revisit the plan to assess if it is still relevant or if new opportunities present themselves. Consistent and timely revisions are necessary to update your operating expenses, labor needs, and inventory.
Keep proper documentation and organize your books. Clean books allow you to see financial patterns better.
Take advantage of technology. There are numerous cloud-based systems that can help business owners keep track of their finances.
Make it a team effort. By involving your team in the creation and maintenance of the budget, tracking it will become easier. Teamwork will give your employees a sense of inclusiveness that fosters a better sense of responsibility and accountability.
Analyze your business expenses, decrease or terminate those that are not creating returns or those that do not affect revenue in any way. Reconsider supplier contracts that might be renegotiated.
Because of the new normal, it will take more time for your budget to adjust to the new environment. Now is the time to look back at your business plans and determine if your budget has affected them in any way. Have you achieved your five-year goal? Haven’t you?
If you are having a hard time adjusting, here at Mehanna Advisors, we specialize in tailor-fitting budgets for your business-specific needs. Reach out to trusted experts, after all, while it’s good to make mistakes, it’s better to learn from others.