The basics of business budgeting

Every business is different, and every business will have distinct ways of setting budgets. But each and every organization needs to know what expenses they can and can’t afford. This is true whether you’re just getting a small business off the ground or managing a large company.

An effective budget should tell you what you have, inform what’s important, and take into account your goals for the future. Setting budgets can help you spot issues early and stay nimble, keeping your business’s funds secure even in tough situations.

Quick steps for setting up a business budget

1. Add up your income

Go month by month and add up all of your business’s income—every sale, customer payment, growing investments, or other sources of positive cash flow. You can start with a single month, but more time is better. To maintain an effective budget, you’ll need to keep accurate track of income month after month.

2. Determine fixed and variable expenses

Next, you need to calculate your costs. Typically, costs are broken down into fixed and variable expenses.

Fixed expenses are those you pay every single month, like bills, rent, and payroll. These usually cost the same amount each month (or similar amounts). 

Variable expenses are things that you expect each month that have fluctuating costs. Marketing budgets, some utilities, materials and other inventory costs, and office supplies are all common variable costs.

3. Plan for extras and emergencies

There will always be unexpected expenses, but that’s only an issue if you’re unprepared. A good budget should include a safety net to cushion the blow from surprise costs. 

But how much should you budget for the unexpected? Your variable expenses can reveal patterns that help predict extra costs. Try to plan for new equipment, upgrades, and repairs (and leave some extra room for emergencies). 

4. Determine your actual cash flow

Cash flow is the relationship between costs and income over time. To calculate your cash flow, add up your revenue for a single month and then subtract expenses. Next, do the same for every month. It can help to plot your income and expenses across days or weeks to analyze if there are times where you typically have higher or lower cash flow. 

5. Refine and adjust

Now that you’ve analyzed your cash flow and understand your profit-and-loss, you can figure out what is available for budgeting and make adjustments. Did you spend more than you earned? Time to cut back on expenses or bring in more sales. If your business is turning a profit, consider investing in upgrades or marketing budgets for new customer acquisition. 

A basic budget will only take you so far. Your business budget needs thoughtful stewardship, which means constant improvement. Next, we’ll share some quick tips on taking your budget processes to the next level.

Check benchmarks for your industry

There is a wealth of information available on expenses across different industries. Search the web, browse the IRS website, or ask other business owners for a rough estimate of what percentages of income go towards different expense categories. This information, even at a high level, can help you plan and refine your business’s budget.

Take advantage of software

If you’re just starting out with budgeting, spreadsheets are great for documenting expenses and revenue. 

Spreadsheets, though, can be limiting. They’re time-consuming and prone to user error. As your budgeting practices grow more sophisticated, software like QuickBooks can save you time and hassle.

Business expense solutions like the Brink’s Business Expense card come with easy-to-use tools that track expenses and cash flow automatically, making it simple to stay on budget.

Try rolling budgets

Are you tracking expenses as they happen, or only calculating budgets on a monthly or quarterly basis? The best budgeting processes use live data and small, practical scopes. A rolling budget is simply one that accounts for weekly expenses and adjusts based on any changes to expected costs and revenues. Rolling budgets can keep your finances nimble and your business prepared for the unexpected.

Get buy-in

Managing budgets effectively is a team effort. Your budgeting strategy should be well documented and easy to understand and access so that everyone in your organization has a chance to provide feedback. Getting buy-in from your team is critical in ensuring that everyone honors the budgets you work so hard to manage.

Factor in some budget flexibility

All budgets are based on likely scenarios, but what happens when reality throws you a curveball? Do you have a backup budget ready? Create a secondary (and even a tertiary) budget for different paths your business might take. Consider how things would change if you experienced a surge in customer demand, employee attrition, or the cost of materials. That way, what could be a hard-hitting change becomes part of your plan.

Test different budgeting methods

There are a number of different budgeting methods you could put into place in your organization:

1. Incremental budgeting uses historical data to predict future cash flow, which is great for expected costs but can be less flexible.

2. Zero-based budgeting starts from zero and budgets based on your business goals, meaning each and every expense needs to be justified.

3. Activity-based budgeting operates based on the cost of providing each product or service within your organization.

4. Value proposition budgeting examines the value that each line item in your budget returns, minimizing those that aren’t cost-effective and maximizing the areas that add the highest value.

Ultimately, it’s up to you to experiment with your budgeting process to find the right fit for your organization. You may discover other methods (or combinations of them) that end up helping you hit your goals.
At Brink’s Money, we provide easy-to-use solutions for managing expenses and budgets to organizations of every shape and size. Contact us online to share your budgeting challenges and learn how we can help.