The beginning of the new year is the perfect time for everyone, including business owners, to think about new resolutions and to make new plans. After a very volatile 2020—statistically, the most volatile year of the decade for most markets—the importance of financial planning and good bookkeeping is more obvious than ever before.
As an experienced accountant or CFO will tell you, one of the most crucial components of the financial planning cycle is budgeting. A good budget will set the financial parameters within which your business can operate, but at the same time, will also allow your business to adapt and adjust as changes and challenges inevitably emerge.
One of the most common questions outsourced accountants are asked is, “How do I create a budget for my business?” Unfortunately, there is no universally right answer. The budgeting process for your business will highly rely on your industry, your size, your current financial situation, and many other distinct variables. There are, however, many basic practices that seemingly every business can engage to improve the robustness and usefulness of its next budget.
In this article, we will discuss some of the most useful budget planning tips for business. By keeping these useful tips in mind, your business will be able to immediately improve its financial situation and move closer to achieving its year-end goals.
1. Hire an Outsourced Accounting Firm
Over the past ten years, the outsourced accounting sector has witnessed a significant amount of growth. It’s easy to see why. Outsourced accounting firms offer business scalable and affordable solutions, giving them access to the expertise and digital infrastructure they need to create a better budget. Even if you have already created much of your budget on your own, your accountant can help check to make sure everything in your budget is accurate, realistic, and useful in the course of business. According to one leading firm, outsourcing can help your business “Uncover key insights to increase your growth and double your profit margins.”
2. Keep Track of EVERYTHING
Bookkeeping, as all business owners will inevitably discover, is all about attention to detail. Unfortunately, many business owners tend to forget that bookkeeping is an active, ongoing process. It can be easy to forget to expense and record the purchase of a $5 pack of envelopes. However, not only will these “minor” expenses begin to quickly add up but omitting just one expense can create dangerous holes in your books (ones that the IRS might take seriously). Keeping track of absolutely everything will help improve your books and limit liability.
3. Be Conservative with Cost Estimates
Too many businesses will dive deep into a major project, only to realize the money they set aside for the project is far too little. At that point, these businesses will have essentially one of two options: they can either abandon the project and accept that what they’ve already spent is a sunk cost, or they can begin accruing debt. Neither option is desirable. Rather than finding yourself facing these common situations, you should be conservative with your cost estimations. As a good rule of thumb, assume that everything costs 20 percent more than it “actually” does.
4. Take a Look at Last Year’s Numbers
Naturally, the best way to begin estimating this year’s expenses is to take a look at last year’s expenses. If your business has been operating for more than one year, you should already have a basic framework to work with (and if you don’t, your outsourced accountant can help you get started). Of course, most costs will increase over time, meaning that these numbers will need to be adjusted. Inflation hovers around 2 percent per year, according to the Consumer Price Index (CPI).
5. Use an Industry Benchmark
In addition to comparing your budget to last year’s numbers, your business should also compare your budgeting practices (and other financial metrics) to industry benchmarks. For example, suppose that you operate a marketing company. What is the average profit margin in your industry? How much debt does a firm of your size typically hold on its balance sheet? Where is your business currently spending too much or earning too little? While it is obvious that not every business within an industry needs to be the same, these comparisons will make it much easier for both you and your accountant to find possible red flags.
6. Build a Generous Emergency “Stash”
The COVID-19 outbreak took the world by storm and while few could have predicted how this exact outbreak would unfold, there is no doubt that events like this periodically occur, often throwing businesses into financial disarray. The housing crisis of 2008 marked a similar event. Knowing that something unexpected is likely to happen, your business needs to consistently be setting money aside in case of emergency. Ideally, your emergency stash will be extremely liquid (consider a high-interest savings account).
7. Break Large Projects into Smaller Components
One of the most challenging components of budgeting for large projects is that, well, these projects are indeed large. However, as your CFO advisory might explain, the best way to tackle these daunting budgeting challenges is to break them into multiple different components. For example, rather than having a broad budget for opening a second location, your business might break the budget down by real estate, acquisition, operating, and construction expenses (plus whatever else you might need).
8. Create Multiple Different Budgets
While creating multiple budgets does require a bit more work, they can help give your business considerably more flexibility. After you and your accountant have constructed a “standard” budget, consider creating some “contingent” budgets that correspond to various scenarios. What happens if your revenues double? What happens if your revenues are cut in half? Answering these questions in advance will help your business adjust, as needed.
9. Don’t Forget About Taxes
Though this might sound obvious to some, taxation is one of the most overlooked expenses among business owners. There are many different tax challenges that a business can face, most of which come with intense financial or even legal penalties if not effectively addressed. Be conscious of all taxes your business needs to pay and when these taxes will need to be paid. Additionally, you should consider speaking with your accountant about making a tax payment plan.
10. Make Changes Over Time
Lastly, while budgeting helps your business get oriented for a new financial year, there is no doubt your business will need to make adjustments. That’s okay. A good budget is not meant to be permanent, but to be useful. As long as you are willing to make changes, you can improve your bookkeeping practices, keep your eyes on the prize, and have your best year to date.