5 Recommendations for Building a Solid Budget
A budget is one of the most important documents in a business. Which is why it’s imperative you create one that can withstand changes in the environment.
Set realistic budget expectations
If you don’t plan to make changes in your business, don’t increase the numbers in your budget. Justify each expense in relation to its profitability and long-term versatility. So make plans and strategies to support new projects. Furthermore, get estimates for every potential cost you might have to make in the next period.
Separate fixed and variable expenses
Each business has some expenses that stay constant throughout the year, and some that may vary. “Fixed costs” are those that are needed to operate your business, regardless of your sales performance. Most typically, fixed costs include payment for rent, electricity, internet, insurance or phone line.
Variable expenses on the other hand fluctuate. In some financial periods, you may not even have them. Material costs, labor and sales commission are some prominent variable costs. They usually increase with an increase in sales.
Categorize all your expenses
Group together costs that are interrelated. Having them in one place makes it easier to spot trends and inconsistencies; creating better plans. For example, categorize all the office costs together – your occupancy costs, labor costs, office utilities, stationery expenses and more.
You can never be over-prepared. As not everything always goes according to plan, allow for contingencies in your budget. So if the price for direct materials suddenly rises by 20%, have a plan ready to account for those added expenses.
Check for adequacies in your budget
At the end of every period, your revenue should be able to cover all costs. Therefore, link your operations plan with your budget to stay on track. That way there will be no shocks. If for example, your marketing department wants to roll out some new campaigns, they can. By sharing plans in advance, the finance department will have the funds ready rather than digging it up at the eleventh hour.