Budgeting for Small Businesses: A Practical Guide

Written by
Marissa Saini
Last Modified on
December 19, 2023

In all stages of your business, budgeting is very important for SMEs to start and set goals and evaluate the feasibility of business ideas.

This is also important for company management to determine the company's financial health. The budget is also needed to identify new investment opportunities and measure progress. In short, business must be built with a structured, neat and detailed budget.

What is a Business Working Budget?

Business working budget is the oldest management tool on earth. Every business needs to have a budget. Unfortunately, too many business people set budget every year or every month and then, they keep this working budget in a drawer and forget about it.

It is as if the working budget only helps in time of needs. Sometimes, it is difficult to make a budget work according to your business needs. Do not worry, here are some steps that can be followed to make your business working budget with much ease.

How to Make Your Small Business Budget Work

Learn to be flexible

Especially when you first start developing a business budget, remember that you are new to this. Like anyone else, you have to learn a lot.

Learning comes from experience. If, at first, your revenue does not not match your expectations, then re-evaluate the budget. In the first year of budgeting, you may have to make a lot of adjustments. It does not matter because the second year will be better as you gain more experience.

Budget in emergency fund in cash

Try to set aside a portion of the each month’s income and put it in a special savings account. Even though your budget will be tight, you will be grateful to still have a reserved fund to deal with a big bill that suddenly crops up.

Check your budget every month

Budgets cannot function if you only put them in a drawer. You should check your budget periodically and see how your business is performing.

Look at your revenue and expenses. If revenue is lower than expenses, try to find costs that can still be reduced to be more efficient.

Pay attention to your cash flow

Cash flow problems which are not handled properly can slowly kill small businesses. Pay attention to your cash flow every month and make sure that the cash flow is always positive. If not, you may have to take a bank loan for a month. If so, make sure you can repay the loan in the coming months.

Budget realistically

A budget cannot be effective if it is designed with targeted numbers in mind. Why is that? It is because you have to develop a budget according to your needs and forecasts.

Use the analysis of your business’ financial results from up to 5 years ago as a starting point. What are the fixed costs that cannot be avoided? Make sure these costs are put in first. Then, you can look for accounts or items that fluctuated significantly in recent years.

What caused the fluctuations? Can you control these fluctuations? Take advantage of past information and adjust forecasted variables to create a more realistic basis when setting the budget.

Be flexible

It is alright to make adjustment to your budget this year because a budget basically needs to be adjusted several times throughout the planned period. Review your budget to check whether your business has a healthy financial condition.

Watch the Details

You can use a working budget more effectively if you have more details in it. For that, you should make sure that you always properly track your expenses.

For example, some working budgets may be alright having a line item called "payroll".

However, there are also other companies that want to break it down based on the type of department or employee position. Similarly, instead of having a line item for "employee benefits", it may be better to include more details like "pension benefits", "health insurance", "vacation", etc.

Observe the relationship of each budget item

Sometimes, you cannot just change one line item in a budget. When you change one line item, this will usually change the other line items drastically.

For example, if you increase your workforce by 10%, you cannot only increase the payroll by 10%. You also need to increase employee benefits, payroll taxes, and other items directly related to payroll.

Similarly, if you think you can increase profits by increasing sales by 10%, do not forget to increase variable costs associated with the sales. For example, commissions, taxes, shipping, and promotional costs.

Take advantage of the right tools

Most accounting softwares have tools to create a working budget. So if you are frustrated with a budget in Excel form, it may be time to use dedicated software that can be used to help ease your accounting work.

The right software can increase efficiency. You will be able to link results from past several years data while analyzing the current year budget in just a click of a button. Let the software work for you.

Be transparent about the budget

A company's working budget should not be kept confidential. Although there are several companies that keep their financial information limited to certain groups, companies will find that sharing budget information with the right people can lead to financial transparency. There are many benefits to this, including increased credibility, more feedback and more effective communication.

Furthermore, budget can be a realistic and accurate tool to be used in designing incentives for employees. As a result, employees can be more motivated to increase the productivity of their respective departments and limit any unnecessary expenses.

By using working budgets as a tool, companies can create friendly competition between divisions or departments. You can reward employees or divisions who provide most feedback and efficiency to keep the company within the planned budget.

The more your company empowers its employees, the more your business will grow.

Get to know your company, build a solid team, and share your working budget with the right people. You will be surprised to see the positive impacts that can be created from using the working budget.

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About the author
Marissa Saini
is a seasoned writer and an avid trendspotter across business finance, personal finance, travel and lifestyle industries. With writing history at SingSaver, INK, and ohmyhome, Marissa leverages her broad range of experiences to simplify finance and make readers financially savvy.
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