Many business owners create a budget when they’re just starting out—or need financing—but then forget it. Even for those who only update their budget yearly, it may not be good as more than a starting point to keep the business afloat. But a budget report can be so much more than that.
We’ve talked before about the importance of staying on top of your cash flow forecast. Well, a budget report goes hand-in-hand with the cash flow forecast to anticipate needs, spending, profits and cash flow. An up-to-date, rolling budget is a tool to improve your business. Below are 4 ways you should be using your budget.
Review Performance and Make Adjustments
The smaller the business, the more volatile and unpredictable revenues and expenses can be. It’s worth the time to update your budget monthly; in fact, for many small businesses, a budget report updated less frequently is all but worthless.
Use old budgets to make ongoing improvements. Compare last year’s data to this year’s to find unexpected seasonal patterns and insight into how your company fares with economic trends. On a monthly basis, compare actual numbers with what you predicted, and try to account for any large differences. Learn from what you did in the past that resulted in different data than you expected, and adjust your estimates and operations where necessary.
To reach your profit goals, use your budget to find
- where you can improve performance going forward
- how and when to expand your business for forecasted growth
- plan for times when you know you are more likely to run into trouble
Check Industry Standards
When you started your business, you probably had to do a lot of industry research to get the appropriate figures for your budget, but those numbers aren’t useful only to startups. Keep an eye on industry standards using small business services, other business owners, and even the library as resources. Every business is different, but large differences between your company and industry averages may point you to where you might best be able to improve performance, especially when it comes to negotiating with suppliers or periodically looking for new ones.
Cut the Right Costs
Staying on top of a monthly budget also provides you with a big picture look at expenses. Use it as an investigative tool to identify areas where efficiencies can be improved and cost reductions can be made. Look for line items that may have increased from year to year and use this information to negotiate with suppliers for better terms or identify new vendors that may offer better pricing. When used alongside a cash flow projection, your budget can help you take advantage of pre-payment discounts with your suppliers. Finally, keep an eye on the little things in office overhead that add up, such as office supplies, telephone and internet expenses, or coffee for the breakroom, etc. If you don’t know how much you spend each month, you will not know if you can find a less expensive option.
Another crucial use for the budget report can be for setting spending and sales goals. Setting expectations for the business as a whole allows you not only to keep track of progress made toward reaching a larger goal but also to get each employee engaged and invested in those goals. Informing employees on the overall goals and progress made toward those goals empowers them be an active part of the plan to reach those targets. A more inclusive culture will give your employees the drive to work harder to ensure that the goals are met.