How to Budget Better for Your Business

The process of creating and then efficiently utilizing a budget is a key element which drives your business' financial future. Yet there can be many questions. For some, the biggest one may be, “How do we start?” Or if you are already using a budget, “How can we make our budget better?”

Lets look at what elements can make you build and use a better budget for your business, there might be elements that you might not be able to use however you might find a few suggestions worthy of incorporating in your budgeting process to make it a more effective organizational tool.

Understanding of a budget exercise

A budget is not meant to manage every penny spent. Consider it more like a guide to assist managers and the team in making better expense decisions, while looking at it as a tool that can be valuable for identifying areas of improvement.

When creating a budget, it’s important to maintain the right mindset, consider the creation of a budget to be a positive move toward creating a helpful business tool, not a hurdle.

You may also experiment with different types of budgets. Budgeting on the accrual basis to estimate net income may be beneficial for some companies, while other companies may want to focus on budgeting for cash flow. Some organizations may actually want to have two budgets to track both of these key financial performance measures. Either way, everyone in your organization needs to be on the same page when it comes to the goals of your budget.

Understand Your Business

One of the most important and crucial steps for any business is to have a clear understanding of the risks in which your business and the industry operates in. If you operate in an industry that is significantly seasonal in nature, an annual budget will probably need to be broken down into a quarterly, or even monthly, approach.

In addition, you should be aware of pending changes in regulations, policies and laws. For example, have you considered of the effects, the recent changes in VAT returns, gold making charges, business legislation in the United Arab Emirates (UAE)? These are the kinds of factors you will need to understand before diving into the creation of your budget.

Another useful element here is comparison of your business to industry standards. Of course every organization differs in an industry, if you can identify areas in which your results vary significantly (and the reasons for those variations), you can make better decisions as they relate to your spending.

Overall, it’s a good idea to identify the most substantial threats to productivity within your organization and the financial impact of such threats.

A Strong budgeting team makes the RIGHT budget

A budget should not be created by one person. If certain groups of employees are going to be held accountable for the budget, then they should have some influence on the creation of the budget.

While A usual practice is to restrict budget creation to members of management, or the finance team. It would be worthwhile to think of including other accountable departments in the budget making exercise, as more often they bring a fresh insight or perspective to the table. Having the right people in this crucial exercise can bring to light elements that you thought might be important, while the relevant department doesn’t. This way a more focused budget might be created.

Have A Realistic Outlook

The budget should be a clear guide developed based on past actual results and future projections. If you create a budget with “unattainable” numbers in mind and unrealistic costing/expectations, you are setting up your business to fail.

Rather, you should analyze past financial results (up to five years) as a starting point. Identify costs that are fixed and must be incurred, understand the market changes, standards and trends while identifying variable costs, look at the fluctuations and question your teams as to reasons for them, and how they can be entered or removed. Using past information and adjusting for predicted variances in the upcoming year provides a more concrete basis for establishing budget numbers.

Be Conservative

As part of your budget, you should factor in some level of the “unknown.” Something which could help you remember that is “You don’t know what you don’t know, but you know that you don’t know something.” In other words, expect that there will be unexpected expenses occurring during the year, that might affect your business or a project.

Consider using a “contingencies” head/item in your budget to help you factor in elements which you know are there but haven’t been accounted for yet.

In addition, always consider the need to plan for future years. Economic downturns are inevitable, so in a strong economic year you should not only create a balanced budget but start building up a cushion for the anticipated rainy days.

Don’t be Stringent in Your Budget, Have a Flexibility Attached

 It is okay to amend your budget during the year. In fact, it should be amended, maybe several times, during the year. Constantly revisiting your budget is a very healthy exercise for your organization’s well-being.  If you wait till year end for actual results comparisons to the budget, there is a high change you will find yourself off-course.

If you find certain line items that you feel are going in "over" the budgeted amount, it is always wise to look at those items that are falling below their budgeted amount and “borrow” off them to equalize the over budget.

Go the Distance, Be Detailed

The more detailed your trial balance is, the more effective your budget will be. Of course by detailed I don’t mean that you make a separate line item for every minuscule expense you make, but the more detailed you can get, the better. This starts with how you are tracking your expenses; do you have similar items clubbed together, are you creating unnecessary items? Do you think your accounts need a fresh look now? These are all questions you should answer when it comes to your trial balance, because when the time comes for analyzing some line items and why they were out of whack compared to the budget, this can help ease the pain.

Knowing and Using the Right Tool(s) for the job

Most accounting software have a budgeting tool built directly into it. So if you are frustrated with your Excel budget, take a step back and check whether your current software has a tool that you could utilize to assist. I found the Odoo ERP software/ business suite extremely useful in this case.

This leads to increased efficiency, since you can link your results to multiple prior years and analyze the current-year budget with a simple click of a button. Let your software work for you!

Everyone Should Know!

An organization’s budget shouldn’t be a secret. Yes some information might be kept accessible to a limited number of eyes, however with the increasing accountability of departments and people in the organization, the budget should be available for their ready viewing. This promotes transparency and potentially increased feedback leading to beneficial communication.

Further, the budget could be used as an incentive for employees to increase their division’s productivity and limit spending. An organization could create a friendly competition between divisions using the budget as a tool.

The more you can empower and engage your employees, the better for your organization. Using the budget as an incentive tool could be a great leap forward.

As I mentioned at the start, while these are useful elements to look at when creating a better and more effective budget, you might not need all of them when making one, so you can always pick and choose those elements you feel which will add the most value when you sit down for your organizational budgeting exercise.