Budgeting is often approached as a rote exercise. Take last year’s budget and add a small percentage to income and expenses, based on your best guess. Total it all up, and what have you got? Basically, you’ve got a paper with numbers on it. What you don’t have is a management tool to track and grow your business.
An effective budget helps organizations to manage day-to-day activities and long-term business objectives. Address these four budgeting priorities to gain understanding and control over your organization’s immediate and long-term needs.
1. Start with the Basics
Identify expenses necessary to operate, both in detail and by category. Use payment history, signed contracts, and other source documents to ensure that budgeted amounts are accurate. Budgeted income should be based on client agreements and other dependable information. Don’t forget amounts received or paid once a year or seasonally.
2. Plan to Stay Competitive
Think beyond the day-to-day. What investments are needed to remain effective and meet industry standards? Automation needed to keep up with your competitors? Certifications or other training required for your team? Needs too large to fund from the current operating budget require decisions about planning, postponing, or incurring debt.
3. Invest for Growth
Considering growth and other strategic objectives in the budget process promotes discussion about balancing the organization’s immediate and mid-term needs with long-term goals. Identifying all funding needs also helps with developing income targets and strategies.
4. Check your Assumptions
Be realistic when projecting future income or expenses. If you assume that income increases by 25% next year, make sure you can point to the activities or plans that make it achievable. Perform some research to verify budgeted costs, especially for new investments or anticipated savings.
Building an effective, useful budget takes time and requires serious consideration of business priorities, both short-term and long-term. But it’s worth the effort, because addressing these four budgeting priorities gives organizations a powerful tool for effective management and growth.