In all of my years as a CPA and a CFO for small businesses, I have found that the concept of budgeting is pretty overwhelming for most people, including owners, CEOs, managers, and directors. I think it’s because no one has taken the time to really break the process down into small, actionable, easy steps to help them. Here, I’m going to take you through a simple process to take your business to the next level with a budget you can stick to, so you feel confident about the health and vitality of your company.
Step #1: Look Back
The first step in the budgeting process is to revisit and reflect on your past financial performance. You can pull your profit and loss statement for the past one, two, or three years to determine what your operations have produced financially. You can do this yourself or ask your accountant or bookkeeper to walk you through this. You can pull this information for a dance season (for example, July through June) or for a calendar year, whichever is more relevant to you for decision-making purposes. The point of this step is to gain an understanding of your business’s growth patterns, or where you might need to audit sales or spending. It will also help you to identify areas where your business may be strong, so that you can consider cultivating more of whatever that is, whether it be selling a specific product or service, or expense management in one specific area, such as labor or supplies.
STep #2: Lay the Foundation
You, as a business owner, should know where you want to go. After all, you are the leader; the one with the vision. Take some time to think about where you see the company one year, three years, and five years from now. Set a revenue goal that has support and a basis to be achievable. Set a goal for what you want to earn personally. This will help you filter and set the framework for the following steps. If you don’t set a destination, you can’t map the path to get there, and you won’t know when you have arrived!
Your next step is to import the most recent season’s (or year’s) profit and loss statement into an Excel spreadsheet. I do this so I have a starting point to create my “working budget.” I then create a column immediately to the right of the actual numbers for that past year and label it “Budget for Next Year/Season.” I also add another column to the right of that to put any notes to justify the numbers I chose, in case I need a reminder later. See downloadable worksheet.
Now you get to work! Methodically, go line by line from income all the way through expenses and ask yourself the following questions for each line, recording your answers in the two blank columns.
– Does the past suggest that this line item will increase or decrease in a predictable way?
– What percentage of increase or decrease should you use, if any? (A reasonable adjustment might be 5-10% in one direction or the other.)
– Is there an extenuating reason (pandemic, new programming, training, product cancellation, new hires, expansion) that warrants a larger increase or decrease in this line item?
Once you have planned each line, you will want to look at the projected bottom line (net profit) to see if you are satisfied with that possible outcome. If you aren’t happy with the result, go back and adjust the budget until you are. Patience, realistic expectations, and honesty are critical here!
This process takes time. Thoughtfully consider each line item and whether or not you and your team can do something to positively affect each one. One time I worked with a small business owner whose organization incurred $60,000 worth of office supplies in one year. Wow! When we went through this exercise and looked deeper at the expense, she realized that she could cut it back. In the next year, with an active effort around budgeting, she cut that expense in half.
Step #3: Break it Down
#1) Divide the year (or season) and the budgeted amounts equally across all months, or …
#2) Divide the year (or season) and the budgeted amounts proportionately across months by historical earning and spending.
For first-time budgeters working on their own, I recommend choice one as a starting point. It is fast and easy and provides something quickly to work toward.
For more experienced budgeters who understand which months their business will earn more and spend more (or earn and spend less) choice two will benefit you more. This way you can categorize the budget in a more timely manner to get an accurate picture of the business operations. The best way to do this is to use prior year percentages of earning and spending, and apply those to each line item to determine the monthly amounts.
Whichever method you choose, get this step done! It is the way to get proactive in your business for selling and for spending.
Step #4: Get it Recorded
At this point, your budget is ready to go, but you need to determine how you’ll know whether or not you are on track. So, identify how you will measure success. I suggest putting the monthly budgeted amounts into your accounting software. Some people prefer to use Excel, which works well as long as you enter the income and expenses regularly to compare to your budget. I recommend entering those transactions weekly to review your budget in a timely manner.
step #5: Take it to the Next Level
If you are looking to take your budgeting further, I also recommend getting an expense request system in place for your employees. An expense request system requires more thought for spending decisions. It allows you to stop and analyze, based on budget, as to whether or not you should spend the money at that time.
To get a great system in place it takes just a few tools. Here is a list to get you started on the right track:
- A Google form or similar method for submitting spending requests. This form should require the following details:
- Description of the product/service to purchase
- Price (including any tax)
- Whether or not the employee believes it to be within budget
- Requested date to purchase by
- A designated day and frequency for when you will review the requests so your team can plan accordingly.
- A predictable form of communication, such as email, back to the person about approval or disapproval.
- An accountability system for confirming as to whether or not the person did as you asked.
step #6: Follow Your Budget All the Way Through
Last, you will want to give yourself a “report card” regularly, preferably at the end of the month to see how you measured up with your budget compared to actual spending. You will want to analyze the areas where you are over budget and where you are under budget. Go line by line, just as you did initially, to see where you can make better decisions as you head into the next month … and throughout the rest of the year.
As the leader, you set the tone for your business. You define what should be done and when, with which funds. If you take the steps to implement an active working budget, you will have the power and the information to make strategic decisions to lead your company and fulfill your vision. Take the time to do this now to make your business stronger than it’s ever been!
Extra Food for Thought:
- If you are over budget on something, you must modify to be under budget on something else.
- The timeliness of income and expense transaction entries into your software has a direct impact on when you should review expense requests. (For example, if you only enter transactions once per month but you approve expense requests weekly, you may be approving things blindly. This will not aid your budget maintenance!)
- If you don’t do your own books, require your bookkeeper to prepare
these reports for you to help you learn and grow.
- Have the discipline to “spend” as late as you can or not at all. You might not need what you think you need … now or later.
- Teach your employees to adhere to an expense approval system before they spend, rather than spend and then submit the expense request afterward.
- Match up expense requests with the actual spend, as many people tend to forget things like shipping, tax, etc. Then, educate your employees to correct this for future spending.