Budgeting for Small Business

Budgeting for Small Business

Budgeting is a yearly exercise that companies undertake. A company’s budgeting strategies and budget allocations will determine its future. In today’s fiercely competitive marketplace, budgeting is no longer just an exercise in fiscal restraint, savings, and prudent purchases. Determining budget allocations for new projects, investments, and technologies will determine the onward trajectory of a company. Sustainable businesses are built as much on the kind of budget that is set for a fiscal year as they are on people and products. No amount of talent, resources, skill, and innovation will help if companies do not have the budget to invest in them.

Budgeting is a prerequisite for successful business management. In this new age of digitization, where the customer dictates the market for a product or service, even small companies have a lot at stake in terms of bringing their offerings to the fore and ensuring steady sales. Here, prudency in budget allocation and budgeting strategies will help small businesses navigate the tough landscape of digital-first companies to reach the customer. As small companies take on more business, they need to spend or invest more in resources, technology, and manpower. Additionally, there will be a need for them to make their internal processes more efficient in order to lower the operating costs, which could quickly become a major percentage of the overall cost to the company. Growing businesses need a lot of resources, but there are also expenses that could pile up very quickly, which is why a clear budgeting strategy is needed. We explore different ways in which small businesses can budget effectively to not just meet short-term needs but also engage long-term growth plans.

Steps for Effective Budgeting

Before we discuss steps for effective budgeting, let us understand what budgeting actually means. It is not a speculation but a rough calculation of future revenues and expenses over a specific time frame. Budgeting may take into account past behaviors of a company in the marketplace and its performance, as a guide to predict the future trajectory a company may propose, and the necessary investments and expenses to account for it.

A good way to ensure near-accurate budgeting is to keep a track of the past expenses incurred and the revenues generated corresponding to the investments. The investments could include a lot of things like added skilled labor, technology, infrastructure, marketing budget, new partnerships, etc. Maintaining a steady ledger of income and expenses over a specific period of time will help a company decide if the existing costs and investments are working, and how they propose to budget for the future. While growth strategies may include new ventures that a company has not undertaken previously, having in place a regular journal of income and expenses will help companies decide how much cash they have in hand post debt reconciliation, remuneration, and taxes; and whether they can afford to spend on new ventures for which they do not have a credible forecast.

Analyzing the finances of your company, and the incoming and outgoing cash flows will help you learn whether the existing systems and processes are working, and whether you need to revise, adopt, or drop some of the investments that you have made. Knowing where your money is going and whether it is working for you is a big part of preparing your new budget for the coming year.

Budgeting is also a time when you identify unnecessary or runaway expenses and decide if you need to cut some of the spending.
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  • Separate Fixed & Running Costs: fixed costs may be inevitable and a necessary component of business. Separating fixed and variable expenses will help you identify areas where you can cut spending. For instance, capital expenses like office space and infrastructure are necessary to get a business moving. Variable costs, on the other hand, are in our control and can be tamed. The costs of stationery, utilities, and even employee remuneration are things businesses can gauge and measure against the overall output, and verify if the outgoing cash in these areas are still justified.
  • Technology: technology is an enabler, and if as a small business owner, you think it is too early or unnecessary to invest in technology, think again. It is the age of digitization, and if you’re not already jumping onto the digital transformation bandwagon, there is a good chance you may soon lose the race for a place in this fiercely competitive marketplace. Technology always enables businesses, and if done correctly and for the right optimization efforts, can impact businesses and revenues positively. Your small business budget must include the latest intelligent automation solution that can help re-engineer processes that are contributing little to the speed, agility, and efficiency with which business should be delivered, in order to keep up with competition. We see that many document-intensive and document-dependent processes like vendor invoice processing in accounts payable, sales order processing, mailroom operations, etc. fall under this category. Accounts payable is a mission critical function that needs to be done right in order to lower the costs of late vendor payments and subsequent mismanagement of funds. AP operations are an important aspect of sound financial management in any company. If payments to vendors for purchases made by your company are not done on time, it could result in you losing not just your vendors’ trust but also piling on more debt as time goes by, reducing your chances of lowering expenses and ensuring extra cash for future investments. Investment in advanced automation technologies like intelligent process automation to streamline invoice processing and other expensive document-based processes can help you cover vendor expenses and improve cash flows for more sustainable investment opportunities. Have a budget for IT technology investments as part of your long-term growth plans.
  • Budgeting for Corporate Travel: part of your growth strategies is to find out what your competitors and customers are upto. Building partnerships and connecting with fellow competitors, customers, and experts in your business ecosystem will help you gauge your standing in the marketplace. Business travel and attendance at various conferences, events, technology forums, and symposiums will help you determine your next course of action and give you an understanding of your own place in the market. Set aside a definite budget for annual or quarterly business trips to popular technology and business events, where you can grow your stakeholder base and consider your next course of action. Many forward-looking companies see corporate travel as an investment rather than a travel expense.
  • Budgeting for a Rainy Day: good business sense entails foreseeing unpredictable events like the pandemic, and setting aside a good chunk of your profits to get through the tough times. The pandemic has forced businesses to re-imagine the way work gets done. Work from home and remote work, although not unknown to the corporate sector, have found new meaning in this new normal. As a smart business owner, you need to maintain a good amount of cash reserves that can come in handy when you need to make adjustments at the workplace like: arranging for remote work for employees for the better part of their working week, including buying IT infrastructure, technology, and dealing with associated costs. Those companies that adapted quickly to the changing market scenarios during the pandemic and made arrangements accordingly fared well, and continue to reap the profits. Set aside a budget to arrange resources and capital for sudden workplace changes and adjustments.

A good way to exercise prudency when it comes to investments and expenses is having your finger on the pulse in terms of market changes and changing customer requirements. Knowing what your buyer wants can help you figure out how much you need to invest and on what. Knowing how the market is changing in terms of, say, raw material supplies and costs will help you focus on your expenses, and lower or tame those accordingly.

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