Background

Planning is an essential component of any business, and it may come as a surprise to some that a small business is in greater need of a plan than larger, more established corporations. The reason for this is that small businesses are more susceptible to instability because they have fewer resources to adapt to chaotic situations than large corporations.

When it comes to effectively allocating business resources, the small business owner must jump through a lot of hoops, which is almost impossible to accomplish, to put it mildly. Small business owners are always looking for new ways to improve profitability, and budgeting plays a significant role in that. It is more so the process of establishing a plan on how best to proceed based upon one’s current resources and goals, as opposed to “what-if” planning.

As a result, the business owners are aware that they require a strategy. They are also aware that a financial budget is a component of that strategy. However, according to studies, two out of every three small businesses choose not to have a budget for a variety of reasons, the majority of which say that “budgets are irrelevant”.

1. This blog post is written by a successful entrepreneur who has been through the process of budgeting.

2. It shows you how to get your small business started with budgeting and it will help you save money overall.

3. The article provides a detailed guide on how to make your budget more relevant.

The problem with budgeting

Small business owners who fail to budget frequently find themselves in a state of financial distress. Because they will not forecast based on accurate financial information, small business owners who do not budget correctly will struggle when it comes to cash flow forecasting, which will cost them money eventually.

Nonetheless, some of the most frequently heard responses from small business owners regarding a lack of budgeting are as follows:

1. Business budgets just don’t work.

2. Budgeting is a time-consuming exercise, and the time is better served by doing something more productive.

3. Budgeting does not bring in money.

4. My business is too small to require a budget.

The overarching trend here is that these business owners do not fully appreciate the advantages of having an official budget as a critical decision-making tool in their organization. They regard it as something that gets in the way of doing “real” business, rather than something beneficial.

Even among those who make a budget, what is more typically observed (even among established major corporations) is that budgets are abandoned practically immediately after they are prepared, mostly because they are irrelevant to the real activities of the company.

The most common reason budgets are meaningless is that they are viewed as a collection of arbitrary numbers that do not correspond to the reality of the situation. It is typically just a slew of figures that are entered into a spreadsheet based on the cash flow projections. Although budgeting can be as simple as entering random numbers into a spreadsheet, this activity can be based on anything from personal experience (which is frequently incorrect) to trial-and-error procedures.

Ten times out of ten, if the goal is only to attach some figures to a paper or if the entire purpose is to simply add x percent to what was spent the previous year, a budget or budgeting system is doomed to be ineffective.

Small business owners must recognize that budgeting based on cash flow prediction is much more complicated than simply placing numbers in the appropriate places. It is about being able to understand how much money the business is spending, why it is spending it, what the costs are, and how much money the business will be spending in the future. When small business owners undertake a cost-benefit analysis, they can compare fixed expenses to variable costs and profit margin before making decisions about whether their fixed expenses are worth the return based on a cash flow estimate.

Small business owners must have information on their company’s profitability, spending, and income to maintain a real-time cash flow forecast. This information will be important for making decisions based on cash flow forecast data.

Tips on making budgeting more relevant

The following suggestions can assist in developing high-quality small business budgets that are relevant to a company’s needs:

1. Always make it a subset of the company’s plan.

It is expected that a company will have a business plan that includes all its aims and objectives. The implementation of this plan is also expected, and budgeting is one of the strategies that will be employed to attain these objectives. Budgeting can quickly become obsolete or even harmful if it does not accurately reflect the objectives of the company.

If it has not been done, the first step is to identify the business objectives. This will assist in determining what expenses should be planned for and which ones should be eliminated. At this stage, it is not even about the cost, but whether the money is being spent in a manner that is consistent with the broader aim.

A portion of the overall business goals should be monetary, and one of the most important steps in budgeting is linking the budget to those monetary objectives. This ensures that the budget is related to the objectives that the company has established for itself.

Do not create financial objectives that are either excessively high or excessively low; this will only lead to frustration and defeatism. Instead, set attainable goals that can be completed within a set timeframe. This will show the start point and areas of improvement.

The budget will always be relevant to the firm if these procedures are always followed by the business.

2. Make it activity-based

An activity-based budget places greater emphasis on the activities that generate revenue and expenditure rather than the amount spent on each item. This means that a business will need to keep track of which activities create revenue and which activities use resources. As soon as this information is obtained, it will indicate where money is being spent and what must be decreased or removed to enhance cash flow.

For example, instead of simply allocating X amount to “printing purchases” and attempting (in vain) to stay within budget, one could determine the number of printers to be purchased, the expected cartridge and paper usage, the types of printers to be purchased, when they will be purchased, and the estimated cost of these activities. A more accurate estimate of the budget’s size will be obtained as a result.

This approach is extremely beneficial in budget variance analysis because it allows for the identification of specific reasons for variances, such as the fact that we purchased three more printers than anticipated or that we took advantage of promotional pricing by purchasing closer to the end of the fiscal year.

Identifying and comprehending the activity (or process) that lies behind the statistics is more significant than simply understanding the numbers themselves.

The activity-based budgeting paradigm is particularly advantageous in the following ways:

1. It allows for more precision because business expenditures are predictable, and planning capital investment based on predicted costs can help avoid unexpected expenses and fund cash flow difficulties.

2. Small business owners that use an activity-based budgeting system are better able to allocate their time and resources because they have a clear plan for each expense.

3. Budgeting becomes more realistic because of realistic projections.

4. Strategic planning enables a small business owner to take advantage of discounts or promotions that are available.

5. It assists small business owners in forecasting their sales costs by activity.

6. It makes cash flow forecasting and the accounting cycle easier.

7. A greater grasp of the costs associated with budgeting is gained.

8. A data-driven activity-based budgeting system can be conveniently handled using the software.

9. Everyone understands their activities even if they are not versed in financial planning and analysis.

It is recommended that small firm financial managers consider implementing an activity-based budgeting strategy, as it gives significantly more meaningful information than simple cash flow forecasting.

3. Make budget/budgeting flexible.

Given that conditions can change in an instant today, adhering closely to a budget created at the beginning of a period in which the key assumptions have changed will render the budget obsolete and unusable for decision-making. As current information becomes available, the budgeting process should be flexible enough to account for it. It should also be flexible enough to accommodate short-term changes from the initial plan.

The basic truth is that no one can foresee what will happen during a budgeting period with any degree of certainty. Therefore, being flexible and willing to adapt to changing circumstances is essential. When current information becomes available, the small business owner must be open-minded enough to recognize the necessity for budgeting based on that information, as well as to examine the immediate impact on financial activity.

Small firms are more vulnerable than large corporations to the effects of changes in the economy, politics, and technology, which necessitate the need for flexibility. However, because of their size, they are well-positioned to respond swiftly to developments. Small business owners should consider their budgeting plan to be a living document that requires continual revision throughout the year for changes to be made in response to new facts or events as they arise, as explained in this article.

The fact that the budget has been updated does not necessarily imply that it was ineffective in the first place. This demonstrates yet again why it is critical to match the budget to the objectives. If the objectives stay constant, modifying the budget to achieve those objectives will continue to be relevant.

4. Be collaborative.

It is unlikely that the finance department or accountant will complete the budget on their own, without the participation of other critical line managers, and that the budget will be nothing more than a nice sheet with numbers on it. Budgeting must be relevant to the business and not merely an accounting process, as previously stated.

Budgeting is everyone’s job because the budgeting activity will have an impact on the cash flow and financial outcomes of the organization, which will have an impact on everyone.

The small business owner should make every effort to include as many people as possible in the budgeting process, including but not limited to:

-Key management personnel who are involved in the day-to-day operations of the company.

-Financial analysts can provide valuable forecast information based on revenue and cost data collected by the accounting department, which may indicate unexpected expenses due to new product development, expansion costs for additional workers, and other factors.

Other factors to consider in making a good budget

• Estimated revenue
• Fixed costs
• Variable costs
• One-off costs
• Cash flow
• Expected profit
• Automation

Conclusion

Finally, it is crucial to emphasize that one of the key objectives of creating a budget is to facilitate decision-making processes. Financial decisions as the key financial decision-maker for a small business will be more successful if they are based on strong assumptions.

Thinking through the plan and the activities that will enable it to be effective will surely ensure that the budget will be productive.

Budgeting is a process that necessitates thoughtful consideration and preparation. By following the suggestions in this article, you will be well on your way to making budgeting for your small business both relevant and manageable.

As a result, budgeting will make financial decisions more effective and business-related.

What are some of the ways that you have found to make budgeting more relevant for your small business?

What types of information would be useful to keep track of when tracking expenses and income?

What’s the most important thing you learned about budgeting from reading this article?

If you require assistance with budgeting or believe that you are experiencing difficulties, please do not hesitate to contact us.