Published Tuesday, September 24, 2013 at: 7:00 AM EDT
Most business owners and high-ranking corporate managers recognize the importance of developing a budget that reflects expected income and expenses for the coming year. But even sophisticated projections aren’t likely to take into account all of the potential calamities, cash-flow problems, employment issues, and other events that might occur. Another problem is that business people often create budgets at the beginning of the year and file them away for months. By the time the end of the year rolls around, it may be too late to make any meaningful adjustments.
Of course, your business isn’t static, so your annual budget shouldn’t be, either. The trick is to create a budget that is dynamic and can be modified easily while still standing the test of time.
Start with the basic premise that virtually every business needs a budget. In its simplest form, this is a detailed plan showing expected future costs and receipts. Not only can your budget help you manage your business expenditures, it also can help determine whether and when your profit objectives are in reach.
Your budget can put you on the right track and give you greater control. For instance, by examining your projected budget for the next quarter, you can anticipate peak periods and schedule inventory purchases and labor to handle the expected sales volume. In addition, you can factor in vacations, marketing plans, and various other activities. Developing a budget is a proven method for running a successful business and you should not be without one.
Here are four practical suggestions for going beyond the basics:
1. Review the budget on a monthly basis. To have your budget be truly dynamic, you should revisit it more than once each quarter—at least once a month is preferable. Include the key players on your management team and update the budget based on the company’s performance during the prior month. Don’t ignore significant numbers that may be indicating a trend. Are you sufficiently stocked to meet sales forecasts? Are there signs you will need to trim the staff or hire more workers? Are receipts and expenses in line with projections, or do you need to cut back or press ahead in certain areas? Getting answers to all of these questions is vital.
2. Implement changes that will have a positive impact. After you’ve conducted your monthly review, it’s time to assess the situation and make any appropriate changes. Focus on steering the business in a positive direction. Then wait to gauge how the changes affect your income and expenses month to month and year to year. For example, if you have been underutilizing your marketing resources, adjust your budget and chart the results over both the short and long term. During your next review session, determine whether you’re receiving a favorable return on marketing dollars spent per sales lead. Use this information when planning how best to allocate your costs for the future.
At the same time, don’t forget to examine receivables. Is there a way you can speed up your invoicing procedures and payment cycles to improve cash flow? Are you doing enough to chase down deadbeat accounts and late payers?
3. Respond promptly to unexpected events. If there is one thing to learn about business budgeting, it’s to expect the unexpected. Your budget needs to have the flexibility to accommodate whatever comes up. Suppose your top client suddenly goes out of business or drastically reduces its purchases. Take a look at your budget and see how this drop-off in revenue would affect your cash flow. Can you find replacement income and how long would that take? What would it cost you in terms of marketing or hiring additional personnel to help bring in new business? Adjust the budget accordingly and move on.
4. Use incentives in the budget process. A good way to get everyone on board with a regular budget review is to tie bonuses to the practice. This is accomplished best at the beginning of the year when you create initial projections. Typically, you’ll establish parameters based on performance, but you also might set up rewards for return on investment from marketing, keeping expenses at or lower than projections, and other objectives. Think outside the box to keep the business humming in good times and bad.
Of course, a better business budget is no absolute guarantee of success. But you can improve the odds by being diligent and responsive throughout the year.
This article was written by a professional financial journalist for Forbes Financial Planning, Inc and is not intended as legal or investment advice.