Business Budgeting

Did you know that 82% of small businesses fail because of cash flow issues, but only 54% of small businesses have a budget? It ultimately makes sense. If you can’t afford payroll, taxes, rent, etc., you will not stay in business very long. To make informed decisions about your company, it is essential to know where your money comes from and what your expenses are. So how do we do that? Simple, we can create a budget.

When you first hear the word budget, you think, Aggghh! All those numbers, spreadsheets, and rules. I hate rules. But it doesn’t have to be that way. Many apps and programs can help you create a budget, even software you are already using, like Quickbooks. First, you need to determine the budgeting process you want to use.

Incremental Budgeting Method

The incremental budget method is very popular because it is quick and easy. You simply take last year’s numbers and add or subtract 10%. Viola! You have a budget; however, it doesn’t consider market changes like the ones we’ve experienced during COVID. It isn’t innovative and fosters a lot of end-of-year spending that may not be necessary.

Activity-Based Budget

Activity-based budgeting takes a different approach, and it seems to work well for environments where new products are introduced because they do not have existing numbers. With this approach, the company determines the amount of revenue it would like to generate and works backward. For example, if they want to generate $500,000 in revenue, what does it take to get there? What are your labor costs, commissions, cost of goods sold, marketing, and other expenses factored into the product’s price? How many units do you have to sell to generate $500,000 in revenue?

This type of budgeting is a lengthy process, and if your results do not go as planned, you need to be agile enough to make adjustments. It also requires significant expertise in planning, forecasting, and budgeting.

Zero-based budgeting

Another time-consuming method is zero-based budgeting because you start with a blank slate and must justify every expense. This method is good at eliminating waste and unnecessary spending. Simply put, just because it is the budget this year doesn’t mean it will be next year. This method holds people accountable for their inflated budgets, but it tends to be short sided because long-term expenses like research tend to get shelved.

Value Proposition Budgeting

If you are looking for a middle-of-the-road type of budgeting, this may be the option for you. Value Proposition Budget is in-between incremental budgeting and zero-based budgeting. It looks at each line item and determines if it adds value to the product. Is it a value to the consumer or stakeholder? Does it give the company a competitive advantage, or is it a waste of money? The focus on value directs money to items that will produce the greatest results, but it can be hard to define what “value” is for each line item. This may not work in every company culture and can lead to short-sited goals.

So how do you get started? Once you decide which method is best for your situation, you must gather the numbers. You can run a profit and loss statement if you’re familiar with Quickbooks. If not, ask your bookkeeper to send you one.

Determine all your income sources. Then determine your fixed and variable expenses. Are there areas for improvement? Are there areas where you can grow the business or areas you need to cut? Are you spending money on unnecessary items? Do you have money set aside for issues that may pop up, like broken equipment? It is important to predict one-time spending like training on new software or replacing worn equipment. When creating a new offering, you need to estimate the cost of goods sold, including time and materials.

At times numbers can be overwhelming, but they do tell a story. If you’re struggling to make a budget or understand your numbers, a good bookkeeper, like Chelsey, can help. Don’t struggle; schedule a call with Safe Haven Accounting today to evaluate your business’s financial health. We are now offering advisory services, including annual budgeting.