Budgeting basics for business success

When it comes to our personal finances, we all know the challenges of setting a budget and sticking to it. For businesses, large and small, budgeting is a must to ensure financial health and is an important part of a business plan for small business owners and large companies alike.

A well thought through budget is the cornerstone for any business and helps finance managers to keep track of income and expenses. It also provides a framework that supports financial planning. A budget can also inform decisions around investments, help to maintain cash flow and streamline resource allocation.

“To the surprise of many, simple budgeting can bring more immediate benefits than financial planning, forecasting and other detailed processes.” says accountant, Bassam Mustafa, in a blog for Forbes.

And it’s not just cash flow and operational management that can benefit. Different types of budget can support better financial control in other business areas including sales and investments, ensuring business success.

Why do I need to budget?

Maintaining control of finances is vital for any successful business, and to ensure sustainable growth, financial planning is key. Budgets can help the process in several ways:

• Tracking income and business expenses to avoid overspending and negative cash flow is vital, particularly in small startups
• Setting financial goals provides a roadmap for businesses to help support business growth and resource allocation
• Facilitate  informed financial decision making when it comes to investments, cutbacks etc.
• Allow directors to compare actual performance against projections to assess key performance indicators (KPIs)
• Help identify financial challenges and risks and prepare for the unexpected, mitigating the impacts of an emergency, like a leaking roof, or software outage.
• Help with allocation of resources, prioritising essential business activities that align with business objectives.
• Financial statements that include a well-structured budget can help build investor confidence and attract funding.

Six steps to a successful budget

An important aspect of business administration is building a detailed financial plan that includes expected income and expenses over a fixed period, like a month, quarter or year. There are several important steps to building a budget that will ensure the balance sheet looks good at the end of the quarter.

1. Estimate your revenue over a specified time. This might include income from sales, investments and other income streams.
2. Define your expenses. Operating expenses should include fixed costs such as rent and salaries and variable costs, such as raw materials and utilities bills.
3. Predict your profit by calculating the difference between your revenue and expenses.
4. Calculate cash flow, anticipating the inflow and outflow of money within the specified time period of your budget. Anticipating fluctuations in cash flow in your budget can make all the difference to your business success
5. Set aside contingency funds for unexpected costs to maintain financial stability.
6. Review and adjust your budget regularly to ensure it remains realistic and aligned with KPIs to inform effective business decisions.

Know your cash flows

Effective budgeting relies on you having a clear view of your cash flow and the liquidity of your business assets. A liquidity assessment using information from cash flow forecasts allows you to get a measure of your company’s ability to meet short-term financial obligations with its most liquid assets, such as cash in savings accounts.

Cash flow ratios include:

• Operating cash flow ratio shows how well a company can pay off its current liabilities from cash generated from core business.
• Capital expenditure (CapEx) ratio measures your company’s ability to finance capital investments with cash generated from business operations. A high ratio suggests the company can fund its growth and expansion without external funding.
• Cash flow to debt ratio evaluates how easy it would be to pay off debts from the cash flowing through the business. This is important for budgeting and can help you plan debt repayments and avoid liquidity issues.
• Free cash flow ratio measures what cash is available after accounting for capital expenditure and gives a picture of how profitable and sustainable your business is, showing how much cash is available for dividends, debt reduction and reinvestment.

If your business’s financial stability and growth is important to you, regularly reviewing these ratios is a must when budgeting to allocate resources to best effect.

Putting your money where your business is

To deliver on your business strategy and achieve your goals, you’ll want to set a budget that allocates funds to priority areas that will support new business, boost profits and align with any social ventures that will help you achieve your mission and vision.

To engage more stakeholders and potential investors, you may also wish to extend your business goals beyond financial performance and include social impact KPIs alongside business metrics.

Deepen your knowledge of the budgeting process

Many entrepreneurs and business professionals find themselves too busy to take time out to advance their knowledge and understanding of the fundamentals of strategy, financial management, leadership and business analytics.

Queen Margaret University’s 100% online MBA programme is designed for busy working professionals who want to advance their careers and deepen their knowledge in a wide range of business skills, from operations and human resources management to leadership and entrepreneurship.  

The course is designed to be studied from anywhere in the world, without the need to attend campus and offers the freedom and flexibility to achieve your goals while continuing in your current role, allowing you to apply what you learn in real time.