Personal and professional finance are not all that different. It's easy for habitual money habits or patterns to form a rut that no longer serve you. Or, they may be keeping you back from the ability to capitalize or sustain your next big venture.
The key is to create a budget and stick to it, while allowing enough flexibility to amend the budget as your business evolves. That last part can be a challenge, especially if you've fallen into unhealthy financial patterns.
4 Steps To Transition Your Business Budget
In good times, your budget will transition to meet the needs of a company with more revenue than projected. In more conservative times, business budgets require savvy reconfiguring to keep the business viable. Some of the most common reasons a business needs to transition or re-think their budget include:
- Revenue is stronger, or weaker, than predicted.
- The market, including key currencies or commodities, is weaker than predicted.
- Core suppliers, vendors and/or subcontractors have changed the way they do business - perhaps even becoming competitors.
- New technology or innovations would allow you to change how you do business.
- The business is relocating, expanding, or moving storefronts.
- Key personnel are available or need to be replaced.
- Natural disaster or unexpected calamity.
Regardless of the reasons why the budget is changing, smooth transitions are always easier to swallow than abrupt or dramatic ones.
1) Be Clear About Why the Budget is Being Amended
Every balanced budget starts with a thorough market analysis combined with rigorous internal querying. Questions to ask yourself, the management team and key personnel include:
- How close was the budget? If the budget was pretty close, but didn't quite hit the mark, you did a pretty good job in your initial planning process. Minor overages or shortages require minor adjustments. If then entire budget was away off, you'll need to go back to the drawing board. It's a sign there there was a disconnect between the initial analysis and the budget planning phases.
- What adjustments need to be made? You may find you were on target in several arenas, while one or two others had glaring discrepancies. Locate the reasons behind why that occurred, and you'll identify the adjustments required to create next year's budget.
- What adjustments need to be made in the future? If you're planning on implementing new CRM software, will be hiring a full-time HR employee or will be expanding the storefront, you'll extra capital. Perhaps you've noticed that while cash flow is consistent over the long-term, there are points in the year where customer payments lag - in which case increased revenue via factoring or a business loan will alter how the budget looks.
- Is performance an issue? If the budget is continually short, and you feel your market analysis is on par, you may need to think about ways to optimize employee performance/production to make up the difference.
Answering these basic questions will provide a more focused view of what transitions need to occur.
2) Create a Manageable Spreadsheet
There are so many spreadsheets out there to help you create a visual representation of your budget. The right formulas will also allow you to play around a bit, providing an instant view about how changes in one area of your budget will affect other parts, as well as the whole.
You can download small business budget templates from a myriad of sources, including QuickBooks and Google Docs. Always err on the side of the conservative. Of course, you want to think positively in terms of business performance and projections, but small businesses are much more susceptible to fluctuations in the market so it's better to err on the side of the conservative, and be generous with your emergency funding, than it is to find yourself in an upside-down budgeting bind.
3) Schedule Frequent Budget Reviews
Many business rely on annual budget reviews; this is a bad plan for small business owners. Instead, review your budget on a frequent basis. In the beginning, a monthly review makes sense. After the first year or so, quarterly-reviews may be sufficient.
Frequent budget reviews allow you to catch those discrepancies and disconnects (See #1) before they cause a serious problem, allowing you to make more modest - and less dramatic - adjustments as needed.
4) Remain on the Lookout For Cost-Saving Strategies
Frequent budget reviews will keep you from getting too comfortable with weak budget projections, and more inspired to seek cost-cutting methods that keep you in the green. Examples include things like shopping for vendors/suppliers with more competitive prices, waiting until the start of a billing cycle to make purchases and taking full advantages of payment terms offered by suppliers.
Effective, flexible budgeting makes for a viable business that grows from the security of a strong financial foundation.
