Just about every business owner knows their market, their product, and their customer base like the back of their hand. But no matter how familiar you are with the nuts and bolts of your individual business, for many, budgeting isn’t necessarily a skill that comes easily.
However, proper budgeting can mean the difference between a business that’s a rousing success after just a few years and one that struggles to stay afloat for decades. Read on for some of the most important budgeting and forecasting basics that smart business owners know.
Start with Historic Data
When you’re just getting started, it may make more sense to refer to your budget as a “spending plan.” This reframing can help prevent you from feeling restricted by budget constraints while still giving you a good baseline of numbers to work with.
By tracking your revenue and expenditures for a few months—or, better yet, comparing your current numbers with those from this time last year—you’ll have a far better handle on where your leaks and overages may be and what you can do to cut down costs without impacting quality, speed, or other intangibles.
Distinguish Between Fixed and Variable Costs (and Revenues)
Some components of a business budget are highly predictable and unlikely to change. For example, overhead costs like rent and interest payments should remain fairly static—starting the budget process by populating these fixed categories can give you a good framework within which to estimate less-predictable expenses.
Other costs, like employee salaries and benefits, can be a bit more variable. However, by using last year’s salary numbers (plus any cost-of-living raises) to extrapolate out to the current calendar year, you’ll have a pretty good handle on what you’re able to spend.
Finally, there are totally variable costs, like the cost of goods sold (COGS). It’s best to tie these expenditures to revenue, which can prevent you from overspending during an unexpected slump.
Research Industry Standards
Even if your business is just a “spinoff” of sorts from a former position in the same industry, it’s a good idea to check out industry standards in pay, revenue, and other economic factors to make sure your business’s practices aren’t too far afield.
By talking to other business owners, reviewing public IRS data, and performing online salary and benefits research through sites like Glassdoor and Indeed, you’ll get a far better idea of how your plans and processes stack up to those of your competitors. This data can let you know where changes need to be made to attract higher-quality job applicants, reduce your inventory expenses, or gain more favorable credit terms.
Let Klein Hall Help
While it’s important to know the business budgeting basics (as well as how they apply to your revenue model), many business owners fall into the trap of spending too much time on these types of administrative tasks and too little time on growing their business.
Klein Hall has the experience to assist you with developing and critiquing future assumptions, as well as gather the right information so you can create a budget and goals to compare against actual results.