How to Create an Effective Budget

5 min read
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Executive Summary

Building and managing an effective budget require efficient practices, discipline, and adaptability. But the more you do it, the better you’ll get at building an effective budget. Learn more about the key actions you should be taking.

Disclaimer: Our first priority is giving you the best financial advice for your business. Tillful may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations in the content on our website. Editorial note

Creating a budget, whether you run a business or not, may sound like a no-brainer. Of course, we need to budget, but how do you do it? More importantly, how do you create and stick to a budget that gives you enough margins for both savings and errors? How do you make it work for you in a way that provides flexibility while staying realistic for your company’s various needs and changing circumstances?

With this in mind, it suddenly might start to sound overwhelming. But breaking things down makes it a more manageable and enjoyable task. Once you’ve figured out what works for your business, you can relax knowing you’ve established a financial infrastructure that will keep you in good stead. You can also take comfort in knowing that a well thought out budget is there for you whenever you need to fall back on it.

Ready to create a small business budget that will get you to the next level? Here are the key actions you should be taking.

Understand what it means to budget

First and foremost, sit down and itemize all your revenues and costs. It may sound tedious, but this is an essential step because doing it will expose your spending habits and identify repeat outgoing transactions you can adjust if necessary. From there, you can make decisions about where you should cut back or invest more. This step can also help you understand if you might need a loan, and what revenues can be used to pay back the potential debt.

To do this, examine your revenue and expenses from the year before and begin adjusting the numbers to prepare for the year ahead. Make sure they are realistic and think about giving yourself some leeway for emergency transactions. Think of it as insurance against any mishaps that may come your way. Identify any income you expect to earn and include outgoing transactions such as payroll, marketing, overhead costs, and equipment or technology maintenance.

Look to the future

Next, create a forecast of your company’s future that takes into account everything financial, including known expenses and revenues, but also unknowable factors, such as changes to your industry or new market trends. This is more complicated than budgeting, but doing so will give you a rough guide of what your firm’s financial health might look like.

Use both business data and your gut intuition to guide you. Forecasts can be done in both the long and short term. A  longer-term forecast usually complements a long-term business strategy, while a shorter-term forecast helps with operational aspects that keep a business afloat. You can also choose to create multiple forecasts for comparison, and some businesses use optimistic, pessimistic, and ‘most-likely’ forecasts to plan for growth and allow for adjustments.

It’s also a good idea to update your forecast regularly because things can change in the blink of an eye. Much like unsettled weather, it’s better to periodically check in on your forecasts so you can adapt to any pivots in the market that otherwise would keep your business on its toes.

Let the past be your guide

We just spoke of looking into the future, but studying the past also has its benefits. Collecting and analyzing historical transaction data that your business has been accumulating can help give you an idea of what to expect for an upcoming period. Look back several years if possible, then collect and organize the data so that you can see clearly how your financial habits have fared so far. Then use the results to influence the way you set your budgets in the future.

Trust your intuition

It’s easy to relinquish all control of your budgeting tasks to the endless number of platforms, spreadsheets, and calculators out there, but there’s nothing quite like your business intuition. As a small business owner, the more control you take of your budgets and finances, the savvier you will grow about how and when to spend, and on what areas.

Learning to best use your logic and intuition can help you make decisions quickly and intelligently. This is especially useful when you are intimately knowledgeable about the numbers your business produces. So if you haven’t already, return to the top of this list. Understanding the data and getting a comprehensive view of the numbers is key to then using your intuition to guide decision making.

Both logic and intuition play critical roles in strategic planning when applied in the right places and at the right time, so take the time to fine-tune these skills.

Predict the unpredictable

While it’s true that by definition, the unpredictable can usually never be known, you can always prepare for rainy days. A great way to hedge against unforeseen financial events is to look at your company’s history. Perhaps at some point in the last year, there was unexpected maintenance that needed to be paid for, or maybe you scored a fortuitous windfall that boosted your income. 

Make notes of how much money came in or went out during those events, and adjust your future budget accordingly. You won’t be able to pinpoint exactly what will happen this year, but you may as well prepare for similar scale events.

Hope for the best, but prepare for problems

There’s no harm in forecasting the best-case scenario for your business. After all, you want to succeed! Having an idealistic forecast can help you set goals and ambitions that give you the fuel you and your team need to keep running the marathon. Having a big, optimistic forecast also lets you work backward to see how your business might be able to get there. If the numbers just don’t add up, you can scale the forecast down and try again. 

Preparing for tough financial times is one of the best things you can do for your business, but that doesn’t mean you shouldn’t be crossing your fingers for sunny weather also.

When you start budgeting and forecasting for your business on a regular basis, you’ll begin to see patterns emerge that will be helpful in the long run. It takes practice and patience, and you probably won’t hit the mark every time. But the more you do it, especially forecasting, the better you will get, and the more you’ll see your small business budget start to shape and push you further toward your goals.

About the author

Kathryn Rungrueng

Written by Kathryn Rungrueng

The Tillful team is writing articles to help companies grow their credit and improve their business financial health. If there’s a topic you’d be interested in learning about, let us know at contact@tillful.com.

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