When we talk about successful businesses, there’s usually one common thread: they know where they want to take their business and how they’re going to get there.
The best way to achieve this is by creating a budget that identifies where the business is headed, responds to the bumps and opportunities along the way, and allocates resources to maximize profitability. In this article, learn how to use a budget to help your business succeed and grow.
Create a Budget
Reflect on Previous Years
Just like budgeting for a future vacation, you must budget for your business. To get started, take stock of where your business is at by using previous years’ experience. Gather information such as previous years’ sales, cost of goods sold, operating expenses, taxes, assets, and liabilities. This will help you understand where your business stands and give you a foundation for your budget outlook.
Look at Other Businesses
You must also look at other businesses in your industry. You can do so using databases that will provide benchmark standards. For example, BDC’s Workforce efficiency benchmarking tool lets you look at your revenue and profit per employee and find out if you’re maximizing your potential for profitability compared to your peers.
You should also adjust benchmarks based on how other similar businesses perform in your region. By comparing your business to others in your industry, you’ll get a good idea of what’s normal and how your business compares.
Using this information, you can create an annual budget with a baseline of how your business should perform in terms of revenue, costs, and cash flow. This also allows you to compare how your business actually performs against the budget, which is called the “variance”. A budget variance is a term to describe costs being higher or lower than the standard or projected costs.
Use a Budget to Manage and Improve Your Business
Once you’ve created a budget, try to stick with it through the year. Remember to check in regularly (i.e. monthly) to see how your business is performing compared to the budget. Identify and highlight large variances, as they can provide important insights into what’s happening with your business.
Examine Variances
If your budgeted sales or costs turned out to be more or less than expected, ask yourself, “Why was that?” If it’s positive, how can you maximize it? If it’s negative, how do you mitigate it?
As you identify these variances, consider their timing and cause. Many events can influence your business’ performance, such as the economy, weather, marketing, new product performance, changes in competition, control failures, and more.
Examining variances in your budget also serves as an important warning sign in your business if things are going awry. By identifying problems early, you can tackle them before they worsen.
Identify Business Changes and What’s Driving Them
Once you’ve established your budget, you can begin to track trends that emerge and change over time. An effective way to do this is by visualizing data using charts and graphs. Mapping these trends with key business events allows you to identify how actual outcomes were affected. By identifying what works and what doesn’t, you can find ways to better allocate resources and improve results.
A budget is critical to understanding your business. For those who have yet to start budgeting and find this intimidating, just start small. Even that first step will provide valuable insights. If you need assistance, you can always consult a financial expert like a CPA to get you on the right track.
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