There are several key factors that both directly affect the success of a particular business and help to measure it. They are equally important for the business as they work in a complex, helping to assess the business’ performance.
However, there is one particular tool that enables businesses to strive for a better organization of their activities and to be overall more structured — budgeting.
At the same time, both the process of budgeting and budget as a document is often considered to be extremely restricting. A lot of people in the business finance world see budgeting as a redundant measure that is not only difficult to execute but is also limiting for the business.
In reality, however, a well-developed operational budget can contribute to designing an outstanding business strategy and work out a plan for a profitable organization. The reason for this is that the operational budget as a tool is capable of preparing businesses for high spending and low earning months and reallocate the remaining finance accordingly to avoid cash flow gaps and subsequently ensure favorable balance sheet figures at the end of the accounting period.
Get a Clear Understanding of Why Your Business Needs an Operating Budget
The first step that needs to be taken when preparing an operating budget for your business is clearly delineating the advantages of the aforementioned budget. While this might seem like a waste of time to some, you need to gain a better understanding of what you need to do and what results your actions will bring. The reason for this is that it would allow you to get a sense of purpose and subsequently be more motivated to work out a more effective and appropriate operating budget.
Therefore, you need to begin by researching the theoretical pros of having a high-quality comprehensive operating budget for your business and highlighting the ones that would have the most direct effects on your company in particular.
For instance, you need to remember that the creation of an operational budget, albeit being somewhat complicated, often leads to better results and enhanced profitability. The reasoning behind this is logical: having a budget set noticeably improves the efficiency of the organization. When you see the breakdown of your cash flow by the department, you will be able to relocate it according to your needs. On top of that, it is also important to remember that budgets are a managing tool that sets certain criteria you need to mean by achieving short- and long-term goals. If you have a definite figure you need to make, you will be optimizing your processes accordingly.
The next practice that will help you to be on top of your budgeting game and allow you to create an operating budget for your business is staying focused.
It is a known fact that budgeting is primarily referred to as working with figures and numbers, so it is essential that you keep track of them and make sure that all of them are accurate and are up to date. This can be particularly tricky if you do not have a unified document where you would store all the information available to you in regards to your business’ finance.
Therefore, it is recommended that you use the auxiliary software that would help you with document creation. Thanks to the rapid development of technology, there are currently apps and programs for everyone depending on the degree of detail and automation of the processes that you require.
If this is your first budget, you might want to start off with some more accessible software that is easier to wrap your head around. Creating a spreadsheet in Excel should be enough to get you started, especially since more and more new features are being continuously added to improve the user experience. Excel spreadsheets are pretty functional and allow people who use them to effectively keep track of all the essential cash movements. Moreover, they are integrated so it is easy to alter figures and instantly receive amended predictions.
Alternatively, you might want to invest in a more professional niche software designed specifically for making budgets. It is more functional and automated and is overall perfect for large companies that need to process a lot of information at the same time.
One way or another, having a template ready will allow you to see trends of various line items. That way, it will be easier to prepare a budget for the next year as you will already have the trend line available to you to use in the forecasts.
Create a Detailed Sales Budget
The first thing you need to do when making an operating budget for your business is identifying all the revenue you will be able to draw in. In order to do that, you need to create a monthly projection of how many products and services you will sell and how much revenue you will earn from selling them.
It is essential that you make your sales budget accurate. While you do not need to account for every available variation of the products or services you offer, you need to be precise with the predicted numbers of items and the price at which they are being sold.
It is essential that you approach this step responsibly and take into consideration fluctuations related to the products and services you offer. Some of the major factors to pay close attention to include:
- Trends in your current and previous sales budgets. This way, you will have a realistic idea of what you can expect from your sales granted that the process is uninterrupted.
- Seasonality of the particular type of products and services. You need to be aware of the fact that some products and services tend to be in high demand during particular seasons, and completely irrelevant in some other seasons. Include this into your projections.
- Potential launches. Are you going to focus on launching a new product or service that could potentially redirect the attention of your target audience to those?
All of those need to be accounted for in order to receive a better and more accurate sales budget. If you manage to do that, you will be able to adjust your spending in accordance with your revenue month by month.
Budget Your Costs and Other Expenses
Once you are all set with your projected revenues, you need to also track down all the spending that your business is making in order to be able to deduct those from your revenue and get the profit figure.
The list of costs that you need to include in your operational budget is pretty wide as it consists of both direct and indirect costs. In addition to that, you also need to outline your operating expenses in the form of fixed and variable expenses as well as account for some unpredictable expenses.
It is important that your business is prepared to handle a force major situation and successfully overcome potential difficulties without going into an overdraft. Therefore, you need to make sure that you add an ‘unpredictable expenses’ line into your operating budget.
As you are planning out your monthly costs and expenses, analyze them and decide for yourself whether you are allocating your finance effectively. Remember that budgeting is a tool used for managing your business and making it cost-effective. Therefore, if you spot an opportunity that would allow better use of resources, address it.
Adjust Your Budget
At last but not at least, you need to be conscientious when it comes to budgeting. While you can construct a good operating budget for your business that would be theoretically flawless, you should always compare it to the real situation and adjust it accordingly.
After all, this document is primarily for you and your convenience so you could see the financial situation within your company clearer. Hence, tweak it continuously to fit reality.
Author’s Bio: Cheryl Hearts is a passionate journalist from Boston, Massachusetts. She decided to dedicate her life to writing because she thinks this way she can be the most useful for the community. After obtaining a Master’s degree in Journalism, Cheryl started running her own blog CherylHearts.com where she’s covering topics of great interest to society.