Creating a Business Budget in 2021
Building a budget for your business can be scary. There are a million and one items to consider and a million and two uncertainties on the road ahead. Whether you’re financially keen or not, it’s crucial that you take the time to develop a budget. A proper budget will act as the foundation for your business spending, and ensure that you’re managing your money with long-term, sustainable growth in mind.
That said, let’s talk about creating your budget and how to navigate once it’s done.
Budgeting Basics
A reasonable business budget is the lens with which you’ll begin to operate. It will frame the areas you’re investing in and expenses you’re willing to assume. Beyond ensuring that your business stays financially afloat, there are a few other critical areas your budget should support:
Decision-making insights; Your budget should be detailed enough to assist you through the decision-making process. Items like employee hiring and business expansion are some that immediately come to mind.
Future visibility; Your budget will be the closest thing you have to a crystal ball for your business. It will tell you how much income you expect to make, how much you anticipate to spend, and where both of those can be traced.
Performance assessment. Your budget will be one of the first items to confirm that things aren’t going according to plan. You’ll be able to compare where you are with where you ought to be, and pull various business levers to better align the two.
Now that you know why it’s important, let’s turn our attention to the proper framework for building a budget.
Budget Framework
Creating a business budget is a lot like cooking a gourmet meal. It takes a combination of patience, know-how, and fine ingredients. Let’s begin with the know-how, where an approachable budget framework will make all the difference.
Key drivers; Consider which items have the most significant impact on your business performance. For revenue, you’ll often include items like sales leads, web traffic, or outbound initiatives. For costs, you’ll usually have items like suppliers and materials, labour, or operational overhead. These drivers will frame the core areas for your budget as they are where the most impact can be had by increasing or decreasing different items.
Key expected changes; If you’re like any other business, there’s a good chance the next 12-months won’t be an exact replication of the past 12. Your team needs to identify key market trends and areas of impact so that you can prepare for when they arrive. Whether this is contact renegotiation, team expansion or contraction, or product line development, you’ll want to budget with the future in mind.
Inputs. A budget is nothing more than a prediction, and so it’s only going to be as good as the inputs you’re able to provide. Your revenue and cost projections, growth expectations, and business development objectives must be as accurate as they can be. You’ll be able to rely quite heavily on past data to ensure items are reasonable.
With that covered, we’ll now turn our attention to the key ingredients available to you.
Budget Components
All of the key ingredients you’ll come to depend on already exist across your core four financial statements. It’s just a matter of combining them to create an appealing product. Below we’ve outlined the most important items to keep in mind:
Revenue; The income you received from normal business operations. If you’re expecting a good year ahead, you’ll want to begin with a growth multiple of this number to set the mainframe of your budget.
COGS; The cost of the product or service you’re selling. Items like labour, material, sales, and distribution should be considered here. Increases should be factored in if the business plans growth.
Gross profit; The amount of money you make from sales, calculated by subtracting COGS from Revenue. This total will give you a great idea of how much money remains for other business expenditures.
Net income; The amount of money your business gets to keep once all costs and taxes have been subtracted. This total is money that can be added to the cash balance and used for growth.
Now, there are a series of online budgeting tools that will help you dig into these areas without needing to be a financial wiz. We’d recommend you check out The Balance or SmartSheet when first diving in.
Oh, we almost forgot about that pesky patience issue. We trust that you’ll be able to sort that one out on your own.
Finishing Items
Like the conversation that follows a great meal, your budget, too, will require some thoughtful consideration and analysis after completion. As the months begin to roll by, take time to assess actual performance relative to projected, starting with a few key areas:
- Revenue change; How are your current revenue numbers lining up with your projected? Are you crushing your expectations or lagging?
- Gross profit change; How is your gross profit relative to expectations? Have you managed to capitalize more on less, or are there still ways to improve your bottom line?
- Net profit change; Are you retaining as much money as you had planned? Have ebbs and flows in sales or expenses thrown you off course?
With those areas assessed, you can then move to investigate spots of interest and determine corrective action. Here are a few examples of what we’re referring to:
- Revenue growth levers; It turns out that revenues are lower than you had projected. Why? What are some ways you can increase sales and encourage growth? New product lines or promotions, maybe?
- COGS adjustment; It seems that your gross profit is, in fact, lower than anticipated. Is there any room to negotiate with suppliers or streamline processes to bring down costs?
- Operational adjustments; You're not making (or retaining) quite as much as you or your investors would like. How can you overhaul operational activities to improve the top and bottom line? Increase spending in certain areas, decrease in others, and so on.
And with that, it’s time to clear the table and prepare for your next meal. A proper business budget is critical to informing the months ahead, but should be revisited at least once per year to ensure that it’s accurate. If you’re still unsure of where to get started after all of this, our team would be happy to lead you on your way.
