Four Keys to Budgeting for Business Owners

Every business needs well-managed capital to scale. That’s why budgeting is critical for business owners. It allows you to think through future purchases and keep an eye on spending.

A business budget is a detailed spending plan for your business against which you can measure actual results. Your business budget should include all revenue and expenses for a set period of time, usually monthly or annually. This way, you can use it as a yardstick for setting up financial goals and tracking your progress over time.

While budgets aren’t always 100% accurate, proper budgeting techniques can help you make sound financial decisions, avoid unnecessary debt, and build a robust and sustainable foundation for business growth.

Let’s explore the 4 key budgeting techniques that every business owner should know.

4 Budgeting Keys

1. Focus on Cash Flow

This is perhaps the most important aspect of budgeting for businesses. While it’s important to be profitable, cash flow is what keeps the lights on and the doors open.

You need to have a clear understanding of your business’s cash flow in order to make informed decisions and gain a better understanding of where you’re currently spending your money.

There are two main types of cash flow: 

• Operating
• Non-operating

Operating cash flow is the money that comes into your business from sales and other sources of revenue. You should constantly be looking for ways to drive this up. Non-operating cash flow is the money that comes into your business from other sources such as investments, loans, and stock sales.

As a business owner, you need to articulate both types of cash flow in your budget to make informed decisions about where to allocate your resources.

Budgeting with cash flow as a backdrop will give you a clear idea of where your money is going and help ensure that you’re making the most efficient use of your resources. It also ensures that you have sufficient cash reserves to wither any storms that may come your way.

When you know your incoming cash flow, you can better estimate your expenses and plan for big-ticket items accordingly. This will help you avoid any unwanted surprises down the line and ensure you’re not found in a cash crunch.

2. Create a Realistic Budget and Budget for Multiple Scenarios

When you’re setting a budget, it’s likely more based on past spending than a holistic view of your business. This means you’ve likely found yourself asking, “Well, how much did we spend last year?” for a particular budget item.

Budgets are a tool to run your business, businesses have ups and downs, which means a good budget includes some flexibility through scenarios. For example, in your upcoming budget, try three scenarios:

• A realistic “worst case”: What spending changes happen when you’re in a cash crunch? What material, roles, and expenses are prioritized?
• Average scenario: Maybe you’re growing 5% year-over-year. How do you best use your budget and avoid issues from that average growth?
• A realistic “best case”: You have big plans. If you win, how does that impact your expenses? 

These scenarios help you not only set up contingency spending plans, but you can also plan for things like lines of credit in the event of fast growth.

3. Make Sure Your Data is Accurate

Accuracy and accounting go hand-in-hand. Without accurate and relevant data, a budget is useless.

As an example, a forecast helps predict potential revenue, cash flow, and expenses over a set period. However, a rolling forecast gets more accurate over time. Why? Because the newest, and most accurate numbers are used to continually update the forecast. 

Budgeting is the same way. Better data in, and a better budget comes out. Accuracy here comes from either:

1. Tracking previous expenses closely, and then taking in factors that affect those prices (e.g. inflation).
2. Doing research on new expenses to get a clear idea of all costs associated with it (for instance, if you buy a large piece of equipment and it needs regular maintenance).

4. Don’t Do a Budget, Use a Budget

Your budget is not a set-it-and-forget-it document. You set the budget before the new fiscal year and review it at the end, right? No. Review your budget, along with the forecast, at regular intervals to make sure the ship is on course. And if you find yourself consistently over or under budget in specific line items, make the necessary changes.

The frequent review also allows you to fine-tune your budget to reflect changes in the business landscape and to respond more quickly to unexpected events or changing demands within your industry.

Your budget should be seen as a living, breathing document that evolves along with your business. It should be fluid, flexible, and adaptable for it to hold and excel through good times and bad.

Ready to Elevate Your Accounting?

Budgeting is an essential tool for all business owners, but it’s only effective if it’s part of a healthy accounting system. By following these four tips, you can ensure that your budget is realistic, achievable, and helpful in guiding your business to success.

If you’re ready to take your budgeting to the next level, we’ve created a guide to help you automate and elevate your accounting.