By Anwuli Chukwurah
How to create a budget you’ll use for your business. Sure, you can trust your gut, but your employees don’t have your gut and will need a concrete plan they can see and use.
When you hear the word, budget, what emotion comes to mind for you? Some dread it and actively avoid using it. Some think it’s restrictive and not flexible enough to match their ideas. But, a budget helps give you a north star to follow. If your business doesn’t have focus, it’ll feel like nothing is moving or things are moving in all directions and yet feel stagnant. A budget can help you focus your energy on one thing for that year. If you realize halfway through the year that the budget you built is over or below your actual results by a huge margin, then at least you have a starting point on what to change for the remaining year.
If you don’t have a baseline budget, then how can you know what needs to change and how to change it? If you feel like your business is off course, you can always go back to your budget to see what your plans were and refocus. It’s not meant to be a restrictive handcuff. You can have fun with it and get into the habit of recording and seeing the changes in your budget and business as it evolves.
Three ways you can start creating and using a budget:
- Simple
- Growth Rate
- Detailed & Bottom-Up
Simple
The simple method of creating a budget is multiplying your monthly revenue and expenses by twelve (annualizing your monthly number). This automatically gives you your annual goal for revenue and expenses. This only works if you’re just starting out and are a one or two-person team. At least you’ll have a goal that you’re trying to reach. You will sacrifice some accuracy with this method, but it’s a starting point. Then, as your business grows, you’ll get a sense of what revenue and expenses look like to help inform next year’s budget. What ends up happening, as you grow, you’ll want a more detailed method to plan for revenue and expenses.
Growth Rate
Another way is to pick a percentage that you think your total revenue or expense will increase or decrease for the year. For this you’ll need your previous year’s total revenue and expense to multiply your rate to it. Some common sense will have to be applied when using this method. You can’t say you’ll 10x your revenue over the next year when you’ve barely been able to double your revenue. Don’t set yourself up for failure, and keep your numbers reasonable. I usually like to underestimate revenue and overestimate my expenses. You’re always going to spend more than you think so you might as well build that in your budget.
Detailed & Bottom-Up
I like using this detailed and bottom-up approach when building client budgets. It forces my clients to think through the levers that run their business. What quantities and at what price do you think you’ll be able to sell every month? If you’re a nonprofit, which donors or grants can you get your funds from? If your business is seasonal, we can build the seasonality into your budget. How many employees do you think you’ll need? Is the number of employees needed associated with your sales? If you have department heads, this approach forces you to talk to them and have them bring their input as to what the budget should look like. Since, they’re living the day-to-day and can accurately estimate what resources they’ll need for the next year. This approach takes the longest to build, but it’s comprehensive and will have every part of the business talking to each other to build a functional budget.
Not having a budget is not an option. A budget gives you a goalpost to look towards and helps keep you honest as a business owner. If your actuals don’t match your budget, at least you have a starting point to investigate the differences. Do you have to change your sales and marketing tactics? Is it an operation issue? Have you hired too many people? Do you need to hire more people? Is your fundamental product that you’re selling not what your customers want? It opens a world of ways to start analyzing and seeing your business. A budget is a plan that you can use to run your business, but don’t feel you have to stay stuck to it. It’s just a plan that can change, but whatever change you plan must make business sense. You can’t change just because you feel like it. Your employees will feel the whiplash and lack of stability.
About the author:
Anwuli Chukwurah is a versatile finance professional with a track record of starting new finance organizations and scaling them for growth in fast-paced entrepreneurial environments. She has over 6+ years of experience working with small business owners, startups, and nonprofit organizations to help connect finance with their business goals. She aims to ensure her clients become comfortable and adept at navigating their numbers. She works with clients at Woolichooks and writes a newsletter for non-finance folks.
Find the Spanish version here.