If you’re like many new managers or if you are the business owner, you may find budget management to be a daunting task. Budget planning is a new skill set for some managers, many of whom find themselves quickly learning budgeting essentials such as developing a forecast, making mid-year adjustments, and tracking expenses.
Sounds stressful, right? Fortunately, there are plenty of budgeting tips that even the newest managers can follow to efficiently develop a budget plan. In this guide, you’ll learn how to create a budget, how to be on a budget, and how to stay in that budget.
What is budget management?
Budget management is the tracking and management of all revenue and costs. This helps managers plan properly for forecasted costs, as well as reallocate when necessary to ensure all areas are properly funded.
Why you should create and manage a budget
You might be tempted to just keep an eye on your revenue and costs as your company spends and earns money, but “winging it” is not the right approach for a healthy, growing business. Budget management is important for:
- Identifying wasteful spending. Budget management shows you where your company is overspending, identifies redundancies in your spending, and uncovers payments for goods and services you don’t use. Cut back appropriately to save costs that can be used for other, more important purposes.
- Discerning your most important revenue sources and costs. As you develop and maintain a budget, you’ll come to learn the most important ways that your company spends and earns money. After all, not every item you sell is going to be your most important product – good budgeting will point toward loss leaders that you can potentially eliminate. Use your company’s spending and earning trends to reshape your budget toward achieving your priorities and goals.
- Long-term financial planning. Planning a budget can be stressful, but not having enough money to stay in the black is way more stressful. Put in the work now to avoid stress later.
The three costs in a budget plan
For a budget plan, costs are generally divided into a few categories:
- Operating. An operating cost is any money spent on day-to-day business maintenance and administration. It includes overhead such as rent and financing fees such as interest.
- Capital. A capital cost is any money spent on acquiring or upgrading long-term capital assets such as machinery and real estate.
- Labor. A labor cost is any money spent on paying employees, providing employee benefits, and covering payroll taxes.
- Administrative. An administrative cost is any money spent on office supplies or other expenses that are not directly needed for any single company department.
Note that in some cases, budget managers may categorize the salaries of certain employees such as receptionists and IT staff as administrative rather than labor costs.
How to create a budget
With all the above budgeting fundamentals in mind, you can begin to craft your budget. You can create a budget by:
- Setting goals. Your budget should reflect your business goals. If you want to hire more employees over the year, make sure your budget allows you to do so. If you want to purchase more equipment, allocate funding and cut back on other costs appropriately.
- Calculating income and expenses. Pull up your company’s sales and purchase logs. Then, pull up information on how much your company pays its employees and how much it spends on operating costs such as rent. Use these figures to calculate your current total income and expenses. You’ll need these numbers to plot your next budget.
- Analyzing your spending and sales. Figure out which expenses to reduce and which business activities to increase so you can maximize your revenue while minimizing your costs. Based on the goals you determine and the calculations you’ve made, you may want to allocate more funding to certain expenses and less to others. You may also want to invest in strategies that drive sales for certain products and services.
Six tips for how to manage a budget
It’s one thing to make a budget. Actually sticking to it can take a lot more work and determination, and there’s no one right or wrong way to do it. Here are six budgeting tips that can help you best figure out how to be on a budget.
1. Manage your department budget like it's your own
Whether or not you’ve realized it, chances are that you live on a budget in your daily life. Every time you decide not to buy something at the mall or go for the cheaper item on a restaurant menu, you’re sticking to your budget. That’s why the first of these budget tips is to manage your department budget like it’s your own. Sure, building a budget plan for a small business often involves entirely different product categories than for a personal budget, but keeping a similar mentality for both puts you in the right mindset for budget management success.
2. Track monthly expenses and make proactive corrections
Good bookkeeping is fundamental to budget management. Track all your business expenses to make sure that you’re spending within the limits you’ve set.
Even businesses with plenty of money will often find themselves having to spend outside preset budget caps to meet their goals and satisfy their customers. If you notice your company overspending in one area and underspending in another, you should proactively correct your spending to stay within these caps. These changes are part of any good budgeting strategy – instead of a reactive approach, make sure to anticipate trends in your business spending and change your budget accordingly.
3. Use technology
Struggling to get a grip on your budget? Technology can help. There’s no shortage of budgeting software that can track all your revenue and costs, categorize your expenses, and assist you in budget forecasting. A simple internet search for the best business budgeting platforms can guide you toward the program that’s best for your small business.
4. Involve your team
Communication is key in any business. The same principle holds true for not just building a budget, but managing it. Get input from your department heads on which expenses they can forgo or scale back, and consult with your employees about sales strategies and product developments that can lead to more sales. Building a budget shouldn’t be a solitary experience – and getting help from other people can prove especially helpful for tackling the next step on this list.
5. Cut down on unnecessary expenses
Cutting down on unnecessary expenses is a bit more complex than just axing costs altogether. What you think is an unnecessary expense might actually be fully necessary for the department in question – you just might not know it without consulting the head of that department. So yes, cut down on unnecessary expenses, but consult with the departments doing the spending to determine just how necessary (or unnecessary) these costs are for them.
6. Sign up for financing and budgeting courses
If you still want to learn more about budget management, sign up for financing and budgeting courses. These courses can give you a firm grip on budget management once and for all – and, if your company policies and initial budgeting allow, you can write off the costs of your classes as business expenses.
Some final budget considerations
Now that you know what budget management entails and why it’s important, you should keep in mind two budget considerations that, though less obvious, are just as important:
- Separate wants from needs. If there’s any item or service you really want for your company, ask yourself: it is really necessary? Unless you can pinpoint an upcoming project or event that wouldn’t go nearly as well without the item or service in question, the answer is probably no, so you can avoid this purchase and keep your budget lower.
- Don’t forget about seasonal expenses. While using one month’s revenue and expenses to create a budget is mostly sound advice, doing so can make it easy to forget about seasonal expenses. If you’re basing your forecast on your company’s spending in May, you might forget that heating your office can sharply increase your business’s wintertime utility bills. Keep the whole picture in mind – everything you can possibly think of – when building a budget, and you’ll have no trouble keeping your finances in check.
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