Having a formal and structured budgeting process is the foundation for good business management, growth and development. Very similar to our personal finances, discipline and planning should be the cornerstone of a business budgeting process.
So where do we begin? As with most things that come with managing an organization, budgeting needs to be driven by the vision (what we are trying to accomplish) and the strategic plan (the steps to get there).
Organizations that stay focused on their strategy and plan know exactly where they want to spend their resources and have a plan to help keep them from spending money in areas that do not line up with the vision (what we are trying to do) and mission (why we are doing it).
10 Steps to Developing and Managing a Budget
1. Strategic Plan
Every organization, no matter the size should know why it exists and what it hopes to accomplish. This is articulated through a written Vision and Mission Statement. A Strategic Plan is the HOW the organization plans to achieve its mission.
The first step in the budgeting process is having a written strategic plan. This ensures that organizational resources are used to support the strategy and development of the organization. It means budgeting toward the vision.
2. Business Goals
Annual business goals are the steps an organization takes to implement its strategic plan and it is these goals that need to be funded by the budget. Goals need to be developed and there needs to be accountability for achieving goals, which is the responsibility of the management team, board or business owner.
The budget provides the financial resources to achieve goals. For example, if your organization has outgrown its facility and there is an objective to increase space, there needs to be dollars budgeted to expand or move the business operations.
3. Revenue Projections
Revenue projections should be based on historical financial performance, as well as projected growth income. The projected growth may be tied to organizational goals and planned initiatives that will initiate business growth.
For example, if there is a goal to increase sales by 10%, those sales projections should be part of the revenue projections for the year.
4. Fixed Cost Projections
Projecting fixed costs is simply a matter of looking at the monthly predictable costs that do not change. Employee compensation costs, facility expenses, utility costs, mortgage or rent payments, insurance costs, etc.
Fixed costs do not change and are a minimum expense that need to be funded in the budget. For example, if there are open staff positions, the cost to fill those positions should be part of fixed cost projections.
5. Variable Cost Projections
Variable costs are costs that fluctuate from month to month, supply costs, overtime costs, etc. These are expenses that can and should be budgeted and controlled. For example, if higher Christmas sales drive overtime costs temporarily, those costs should be budgeted.
6. Annual Goal Expenses
Goal related projects should also be given budgets. Each initiative should have projected costs associated with the goals. This is where the cost of implementing goals are incorporated into the annual budget. Projections of costs should be identified, laid out and incorporated into the departmental budget that is responsible for completing the goal.
For example, if the sales department has a goal of increasing sales by 10%, costs associated with the increased sales (additional marketing materials, travel, entertainment) should be incorporated into that budget.
7. Target Profit Margin
Every organization, whether they are for-profit or not-for-profit, should have a targeted profit margin. Profit margins allow for returns for the business owner or investors.
Not-for-profit organizations use their profit margins to reinvest into the facilities and development of the organization. Profits are important for all organizations and healthy profit margins are a strong indicator of the strength of an organization.
8. Board Approval
The governing board, president, owner or head of the organization should approve the budget and keep current with budget performance. Again, similar to your personal finances, the owner should be reviewing monthly financial statements for the following reasons.
- To monitor budget performance.
- To be familiar with all expenditures.
- To safeguard the organization against misappropriation of funds or employee fraud.
9. Budget Review
A budget review committee should meet on a monthly basis to monitor performance against goals. This committee should review budget variances and assess issues associated with budget overages.
It is important to do this on a monthly basis so there can be a correction to overspending or modification to the budget if needed. Waiting until the end of the year to make corrections could have a negative affect on the final budget outcome.
10. Dealing With Budget Variances
Budget variances should be reviewed with the responsible department manager and questions should be raised as to what caused the variance. Sometimes unforeseen situations arise that cannot be avoided so it is also important (just like your personal budget) to have an emergency fund to help with those unplanned expenditures.
For example, if the HVAC system suddenly goes down, and needs to be replaced, this would be a budget variance that needs to be funded.
Good budgeting processes can help develop and advance an organization, while sloppy budgeting and monitoring of budgets can blindside an organization and affect its long-term financial health and viability.
Finally, without customers, there are no revenues to budget. For this reason, strategic plans and budgets should be targeted at one thing and one thing only – the customer.
This is why it is imperative to identify who your customers are, find out what they want and budget dollars to put systems and processes in place to meet their needs and exceed their expectations.
Isn’t that what we are all trying to do?
If you would like to learn about budgeting for a small business, I love the Dummy books, Small Business Financial Management Kit For Dummies might be a great reference for you!
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Originally posted May, 2010. Updated March, 2014
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