How do companies such as Eli Lilly and Co. or Chick-fil-A continue to be successful? Budgeting is a major piece of the work they put in to know where they are going. A budget is a thoughtful process for what the business wants to achieve financially. It lays out the plan for revenue and expenses.
Your budget helps you:
- Have a road map – what the business should generate in income & expenses
- Control expenses – limit how much you should spend; so, you won’t overpay or waste
- Plan for future growth – helps plan for expansion; ensure the business has reserve
- Push you to grow your organization – striving to meet budget goals, allows organizations to see new opportunities to further expand
Creating a budget may seem daunting. Therefore, breaking the budget into small steps can alleviate the stress in producing a plan you can utilize. Here are seven steps:
- Identify your business goals. Not only include a sales goal, but list operational goals. We want a 90% customer satisfaction. All staff members should participate in one professional development workshop. We want to reduce waste by 30% in the production cycle.
- Review historical data. Run your financials for the last three years. Then run your profit and loss statement by month, for the last year. If you are a new startup, research your competitors. Also, ask your network or mentors to recommend similar organizations you could utilize.
- Project revenue. Your budgeted sales should realistically advise how much you can bring in each month. Reference USA is database with business and residential data in the United States. You can access it free through your local library to view businesses’ historical data
- Project payroll. Now you know what you want to achieve, so now plan your staffing. This step can be tricky because you have to consider factors such as, the candidate’s experience and market. You need people to achieve your goal but be realistic with your payroll budget. Maybe you cannot pay the market salary but offer other perks such as a cell phone plan, discount at fitness centers, year-end bonus, job sharing or flex hours.
- Add up your non-payroll expenses. These are your variable and fixed expenses. They can be supplies, rent, business insurance, taxes or utilities. Plan for particular business expenses to your sector. For example, if you provide marketing services, you may pay a subscription to databases that provide customer analysis.
- Project a contingency fund. Unexpected costs are going to rise. These costs can be repairs to machinery or the purchase of new computers. They can also be for growth. You receive a purchase order for $200,000, how do you handle it? You may need additional staffing or production space.
- Review budget vs. actual report each month. Monitor your budget versus actual expenditures each month. Many organizations create a budget, but do not compare against actuals. Use the budget as tool to make decisions throughout the year.
As the year progresses, items will change. Adjustments might need to be made to achieve and reflect what’s actually happening. Some organizations will change their budget throughout the year. Well-established organizations would have a budget and forecast. What is the difference between the two? Your budget is your baseline on what you want to achieve. Forecasting estimates for financial outcomes, are based off of the actuals that have already incurred.
Both terms are sometimes used interchangeably. As long as you are creating a budget to estimate your goals, go for it. Be patient with your budgeting process. The process will get easier as you continue to put work into creating and utilizing the budget. If you want to win, put in the work!