5 Tips for Creating an Effective Small-Business Budget
A well-constructed business budget can give your company valuable insights into your finances and increase your chances of long-term success. So why do an overwhelming majority of small businesses fail to budget in a comprehensive and effective way?
“The biggest reason is procrastination,” says Ameen Walker, the owner of First Financial of Baton Rouge, an accounting and financial advising firm that works with small businesses of all types. “They know they need to do it, but they just don’t do it. Sometimes it’s complacency. Sometimes they’ve been in business a while so they just keep operating the way they’ve been operating and don’t think they need to do the basics anymore, if they ever did them.”
Without a budget, Walker says, spending can get out of hand quickly and place your small business in a financially precarious position. “It’s usually these small purchases that end up pushing them over the edge,” he says. “When you don’t have a good idea of how much you’re supposed to be spending, you just spend it. If you have some money in the bank, you spend it.”
Walker shared some of the principles of his budgeting approach for small businesses, which is designed to help you better understand your expenses and revenue. These five tips can help any small business draw up a more effective budget.
Start with Quality Info About Your Company and Industry
The first thing Walker says he asks his clients is how much net profit they want to walk away with at the end of the year, before they have to pay personal taxes. Next, he conducts an industry analysis that determines what other companies doing similar work are spending in different areas of their business.
“There’s all kinds of information on the internet,” he says. “Take those companies’ financials and use those as a model for making [your] own profit-and-loss statement. If you pull it out of thin air your own biases are going to be involved.”
When budgeting for an existing business, he looks at as many years of financials as he can to get an idea about revenues and expenses before actually constructing the budget.
Work on Percentages, Not Just Totals
“I think a budget should be put together on percentages, not on dollars,” he says. “Because if you ask a business ‘Is $2,000 a year a good number for you to spend on office supplies?’ they might say yes. That might be OK if you do $200,000 worth of business. But if you do $10,000 in business, absolutely not.”
Look for the lowest percentage in each spending category across all the years the business has been operating. He calls that the “optimal percentage.” “If they operated at 2 percent before, they can do it again,” he says. He then compares the optimal percentage to the industry standards and uses the lower of the two in the budget.
“The budget is the start,” he says. “Once you get these numbers then you can use that for other things: developing your sales plan, figuring out your break-even. This budget is the foundation.”
Budget Monthly, Not Just Annually
Walker encourages businesses to create a budget that’s based on months, not merely annual totals, because nearly every company experiences fluctuations through the year. “Almost all businesses are cyclical,” he says.
“It really doesn’t do much good to do a budget over a whole year and spread it evenly over the months because there are some months you’re going to look like a hero and some months you’ll look like a zero,” he says.
Watch Out for These Problem Areas
Walker says office supplies, furniture and equipment, and computers are common areas where businesses of all types overspend. “No business needs to buy a $2,000 computer unless they’re a VR company or a software company or something like that,” he says.
Walker says other common business budget blind spots are vehicle expenses and annual fees, such as bank or property taxes. Many companies, he says, also pay more for insurance than they should because they fail to get multiple quotes annually.
Revisit and Adjust Often
Walker says that once the budget is complete, businesses need to at least look at their finances on a monthly basis, even if that means going through their bank statement and examining the details about spending over the previous month. Ideally, he says, a company would revisit its budget at least monthly and adjust its spending as needed.
“You can set all kinds of goals and budgets for yourself, but if you don’t have measurable ways to look at them, what happens is you get to the end and you realize ‘I’m over in just about every area,’ ” he says. “Then it’s too late.”