Budgeting sounds easy, doesn’t it? You’ve got X amount of capital, you decide your priorities and allocate. Right? However, there’s more. Solid budgeting is critical to success. So, don’t make the mistake of cutting corners when you are implementing a system.
In this article, we answer eight basic questions you might have for your finance department:
- What is budget planning?
Budget planning is basically determining an organization’s long-term and short-term financial goals. Planning a budget makes managing money easier and more effective. Not only are you putting together a financial roadmap for the future, but it also helps with immediate money management concerns.
For the best results, budgets are often created on an annual or quarterly basis. This timeframe allows incremental changes to be made based on the results and progress of the company.
- Why should I have a budget?
You shouldn’t just have a budget; you NEED a budget. Running a business or department without a budget is like trying to drive a car while wearing a blindfold. You need to plan your budget for several reasons:
- To ensure you’re covered during seasons of unstable revenue in your business.
- So that resources are allocated appropriately for business growth and development, which enables each department and team to know the outcome that is expected.
- Budgeting paves a way to strategize the long-term and short-term revenue goals for the organization.
- It creates a financial roadmap that will facilitate savings and ensure that you don’t spend the money you don’t have.
- In case of emergency, your business doesn’t suffer a financial loss. Cash in the bank will keep things going.
- What if I exceed my budget?
Sometimes, even with precise planning, unexpected costs arise. These costs might cause you to exceed your budget. The best solution is to look for external sources of funding until your business stabilizes.
Better yet, have a backup plan in place in case you can’t stick with the planned budget. Set aside an emergency fund for contingencies.
- How should I think about contingency budgeting?
A budget plan will set a detailed financial scope of your business, including all of the anticipated expenses of running the company. But, you can’t predict the expected costs that might come up. A contingency fund will be an insurance against unforeseen business emergencies.
Part of an emergency fund means that you are planning for the worst. An analysis of risk and probability is one accurate way to plan a contingency budget.
- How should I incorporate scenarios into my budget?
There are certain scenarios and factors you need to consider while designing your budget. Make sure your budget is structured in a way that keeps all the departments and operations in mind. Talking to the managers and department heads can be helpful. The groups on the front lines will help you identify potential gaps in the budget. For example, these people can help you estimate future investment for inventory or machinery.
It is also important to set aside an account for R&D and innovation, as well as sales and marketing. The ever-changing technical landscape has created an environment where is it critical that companies invest in their online marketing campaigns.
The budget should include a contingency and a debt management plan for emergencies. Many other factors might impact the bottom line. So, create a budget that is flexible enough to be revised routinely as needed.
- Is it a good idea to use software to make and customize your budget?
Yes and no! Ideally, you should have a CFO help you plan your budget and customize it. A real person needs to oversee the plan and ensure that everything is implemented in the right way. Even the best software can’t offer the critical thinking and creative strategizing available from an experienced CFO.
But, you can use money management apps or budget software to track your spending and your income. These programs are organized and automated, helping to minimize the ongoing busy work so that you can easily keep up with the financial management. The software can show a good indication of when you need to revise your budget or conduct a financial audit.
- Should I consider KPIs when preparing my budget?
Yes. Key Performance Indicators (KPIs) can point you in the right direction when setting a budget. KPIs can help you plan the smaller details while simultaneously focusing on the big picture. The challenge is to determine what KPIs need to considered. Common KPIs for setting a budget plan often include:
- Operating cash flow and expenses
- Sales and marketing initiatives
- Payroll expenses
- Return on equity
- Burn rate
- Accounts payable and receivable
- Turnover rate
- What is your advice to someone creating a startup budget that will be used for fund-raising?
For an early-stage startup, it is best to get a CFO to prepare the budget. Venture capitalists and investors expect you to have a clear budget plan and a comprehensive financial forecast. Most entrepreneurs and new business owners don’t have the experience to create an accurate forecast to generate the funds that are needed for business efforts.
These investors expect you to know how to communicate important financial performance indicators, such as the anticipated burn rate for your startup. Instead of spending the cash on the salary for a CFO, consider other options that allow you to tap into the experience that is needed at this stage in your business. An external advisor, like a CFO, will help you streamline the process and prepare you for unexpected questions thrown at you by investors.
Do you need help with your business budget? Talk to us to learn how our outsourced CFO services can support your business efforts!