When you open up a business, there are numerous things you have to worry about. From the quality of your products and services to the finances of the company and the satisfaction of your employees, keeping up with everything can be demanding. Luckily, there are various things you can do to make sure that your business is running smoothly. In this article, you will be able to learn about useful budget planning tips that will help out your business.
Decide on the type of budgeting
To be able to make a good financial strategy, you must first decide what type of budgeting you will be implementing. The most common types of business budgeting are certainly bottom-up and top-down approaches. Depending on the current environment of your business and the attempt to balance that against your needs, you will choose one of the two.
When it comes to the bottom-up approach, the way it works is that each of your departments should have its own budget. Each of them should create a comprehensive list of expenses as well as cost projections. After this is done, they need to submit it for review to the senior management of your company. Once they are accepted, these individual budgets will be added together and will form the business’s overall budget. So, choose bottom up budgeting if you would like your departments to play a major role in budget planning. By doing this, your budget estimates will be more accurate, as the departments themselves know best about their expenses. Also, by managing your finances this way, you will know best what the cost and resources of each department are like. And lastly, if you would like to empower your employees, choosing the bottom-up approach is definitely the choice.
When to choose the top-down approach
Unlike the bottom-up approach where the departments prepare the budget for the company, in the top-down budgeting, this is done by the senior management. That is, based on the objectives of the business and their own ideas, they are the ones who create the budget and then pass it down to department managers who implement it. So, if you would rather have your senior management make most of the decisions, then the top-down approach is the right one for your business. By doing so, your budget will be defined with the concern for the overall growth of the company. If you want to save time and resources in your lower management, then this approach is the right one as well. Lastly, this type of budgeting is easier to draft and implement, as you do not have to collect from several departments.
Create a well-thought-out budget
Whatever the approach you choose might be, you have to make sure that the budget you make is well-thought-out. Start by considering what are the projected sales of your business for a certain budget period? Calculate the cost of materials, components, and other direct costs of sales. Think about what are the fixed costs and consider if there are going to be any new ones? Break down the overheads and the fixed costs by type to have a more comprehensive view of the budget, and so on. Whatever the things in your budget might be, make sure that you devote time and energy to think it through thoroughly, as creating a well-thought-out budget is often the key to a business’s success.
When you are planning the budget for your business, it is important to stay realistic. Do not overestimate, but do not underestimate your company either. Analyze the financial results from your business from up to 5 years ago to have a starting point. Think about what are some costs that are fixed and inevitable. What kinds of line items or accounts have fluctuated a lot throughout the years? Was it something inside your business that caused these fluctuations, or was it the changes in the market? Is there a way to prevent these fluctuations?
All of these questions are something you need to ask yourself when you are setting a budget strategy for your business. This kind of analysis will help you set realistic goals based on data particular to your company.
One of the mistakes that many businesses make is being very rigid when it comes to their financial planning. It is only logical not to do this, as the needs and the resources of your business will surely vary throughout the year. So, make sure that you stay flexible with your budgeting. Make sure to revisit your budget a few times throughout the year, as the financial strategies you will want to implement might vary. If you wait until the end of the year to compare results with the budget, you are risking missing out on opportunities and you will be way behind the curve.
Make sure you factor in some slack
When you make your initial budget and when you estimate how high of revenue you will have, remember that these estimates are not set in stone. There might be certain expenses that you will not be able to control and which will affect your business badly if you do not plan things well. So, make sure that you factor in some slack for these kinds of situations. Make sure that you have enough money stocked away or coming in before you move on taking on new employees or expanding your business.
If you want your budget to be effective, you should try to make your trial balance as detailed as possible. Of course, as with anything else, there is a fine line here. Obviously, you would not want to have a separate line item every time you write a check. But, in any case, the more detailed you get, the better for your business.
If having a company was an easy task, everyone would have one. When you are a part of this enormous world of business, you must try to keep up with other businesses. And to do so, and to make sure your business is still at the top of the race, you have to make sure that your budgeting is done right. If you were looking for ways to improve the budgeting of your business, hopefully, this article has helped you out!