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Practical Budgeting for a Profitable Business

Practical Budgeting for a Profitable Business

September 16, 2022
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If you own a business, you know the success of your company starts with a crystal-clear vision and a carefully crafted budget to make it a reality. A budget is an essential planning tool for estimating your business's future revenue, expenses, cash flow, and ultimate profitability. It also aides in tracking performance as you work to achieve your annual business objectives. Think of your business’s budget as a tool to prioritize business initiatives and as the foundation for measuring success.

Depending on business type, your budget will likely entail these basics:

  • Estimated revenue
  • Fixed costs
  • Fluctuating costs
  • One-time expenditures
  • Estimated cash flowing in and out
  • Projected profitability

As we head into budgeting season for the next calendar year, it’s important to assess your budget in light of big-picture goals and the more practical aspects of running a business.

Company Objectives: Your budget should stem from and support a company action plan for the year. If you want to add a product or service line, enter a new market, or gain more share of wallet, you’ll need to prioritize investments in the business — and those investments should show up as line items on your annual budget. A budget is a tactical road map for implementing the business plan that will achieve your objectives.

Financial Goals: Think about dividing your budget into monthly, quarterly, and yearly plans with revenue goals established for each. This allows you to periodically track progress toward your financial goals and know well before year-end if your targets are off track. After all, a budget is your best guess, and it’s a matter of when – not if – it will need to be adjusted.

Debt Management: Debt is an inevitable part of business ownership, but it’s not a bad thing if managed appropriately. You should prioritize where taking on debt will have the most significant impact on business success and ensure you’ll have sufficient revenue to steadily pay it down.

Performance Evaluations: As business owners, a large portion of our expenses can be found in human capital. Hiring and retaining qualified talent is no easy task but replacing long-tenured staff with new employees whom you must re-train is much more difficult. Developing your performance evaluation processes might seem like a human resources – not a budgetary – issue. However, it’s important to plan for cost-of-living increases and merit-based raises as well as new employee headcount in order to protect your human capital.

Plan for Emergencies: We have no control over external market factors such as the emergence of new industry competitors or the unexpected onset of a global pandemic. That’s why it’s important to build flexibility into your budget — establishing contingency line items and preparing for more than best-case scenario. It’s wise to create versions of your business budget that identify where you can reduce overhead or control costs should your original revenue targets no longer be applicable.

Cash Flow: Incoming revenue is the lifeline of your business. Once you factor in operating expenses, employee costs, and existing debt, you should understand the cash flow you have to work with. Being strategic about how you deploy your cash is critical, and that’s where getting financial advice from a fellow business owner can be a real asset.

At Willis & Machnik, we’ve been in your shoes and understand the intricacies of business budgeting as well as potential benefits available under the current tax law. We’ve begun to offer concierge CFO services for our business clients who don’t have this role on staff. It’s just one more way we’re able to be your complete wealth management partner.