Business budgeting can help organisations make informed decisions about their own expenditures. This article will discuss budgeting and why budgeting is important for businesses. We will also share some budgeting tips for small to midsize enterprises (SMEs).
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According to an article by ICSID, ‘many businesses fail within the first few months due to cash flow problems’. This might indicate the importance of having a well-planned budget in place and how it can help businesses foresee any potential financial requirements and then re-structure accordingly. In such scenarios, business budgeting tools might help organisations maintain a balance between financial resources and expenses, and automatically track any budget shortfalls.
What is budgeting and why is it important?
Budgeting is the process of assessing and evaluating your business’ finances to prepare a systematic financial plan. It is generally a calculation of your financial resources and how much your business is spending. For instance, an ideal budgeting plan would involve spending less than what you are actually bringing in.
‘A September 2021 survey of 251 Chief Financial Officers (CFOs) and other finance leaders revealed that 72% of CFOs will focus on improving the flexibility of budgeting and forecasting in 2022, according to Gartner, Inc’. This articles talks about reinforcing the focus on the importance of budgeting for SMEs.
According to an article by business.gov.au, ‘budgets are essential for tracking the financial health of your business’. This indicates that a well-planned budget can help businesses in many ways, some of which are:
- Help control over-spending
- Foresee potential issues where the company’s revenue might not cover all expenses
- Identify any possible investment opportunities in case of extra income
- Help determine all the profits and losses to avoid business debt
- Can help SMEs identify monthly cash flows
- Can help businesses in well-informed decision-making
What does business budgeting software do?
According to Capterra, business budgeting software are tools that businesses use to allocate, track, and manage annual budgets. Such tools provide the facility to help eliminate potential manual errors while preparing a budget. The main objective of such software is to streamline the budgeting process and potentially minimise the turnaround time for financial processes.
Such software offer various features, which include cash management, forecasting —making predictions based on present and historical financial data— and generating profit and loss statements. Some of these tools also allow multiple users to present their projected revenue outcomes to the company’s overall budgeting system, thus promoting team collaboration.
5 Business budgeting tips for SMEs
According to a Gartner report (full report available to clients), ‘the days of financial planning as a static, siloed finance activity are gone’. The same article goes on to mention that businesses might need to conduct budget planning hand-in-hand with other operational planning. That being said, we have listed five budgeting tips for small businesses that might help them set up an effective budget for business use.
1. Regularly track all your expenditures
Closely monitoring all expenses might help businesses understand how much they are bringing in versus how much they are spending. This might also help in determining different income sources. After identifying the varied sources, you would be able to calculate your overall revenue. Moreover, you can observe and examine this over time and see how your business income changes. You would also need to keep in mind seasonal fluctuations in income and expenditures to ensure stability and to accurately calculate your finances.
In addition to this, there might be many different types of budgets that businesses can take into account. Some common types of budgets include financial, labor, sales, operating, and static budgets.
2. Determine your fixed and variable costs
Your company’s fixed expenses generally remain the same throughout the year. The ideal way of budgeting would be for you to determine your business’ fixed and variable expenses. For instance, fixed expenditures like payroll costs, taxes, and rent would likely remain the same. However, variable components such as travel expenses, utilities, hiring needs, and others might change over time.
SMEs who might have just started their businesses can always determine the projected yearly costs and then plan accordingly. Once you’ve determined your fixed and variable expenses, you can then begin to evaluate your projected business profits.
3. Try opting for cloud business models
You could switch to cloud technology-based processes and software to save business costs. As written in a study by Business Queensland, ‘rather than purchasing expensive systems and equipment for your business, you can reduce your costs by using the resources of your cloud computing service provider’. Cloud business models can provide elasticity —wherein organisations can scale up and down their resources as per their requirements. This might prove effective precisely when there are budget constraints.
4. Manage your inventory to control over-spending
You would need to keep track of your inventory —for instance, understanding what is the demand for a particular product, how much revenue it is generating, and what is the demand-to-supply ratio. This way, you would be able to determine the exact quantities of products needed and thereby potentially curb overspending or overstocking.
5. Have an emergency fund
Setting aside a certain portion of your budget in case of unexpected future expenditure would be recommended. These emergency funds might come handy, specifically in the case of an off-season. For instance, a wool-making business might face a capital shortage during summers. Similarly, in the case of natural disasters such as floods, such emergency funds might help SMEs survive tough times.
Careful business budget planning and monitoring overall expenses might help you drive more business profit. In addition, it might not only help you identify where you’re overspending but might also assist you in bridging the gap between your earnings and losses. Mindful business budgeting might be an ideal way to manage your current and future expenses actively.