The Benefits of a Clearly Established Budget Plan

A clearly established budget plan is one of the most important financial tools that every business owner should have, because having that plan is what helps put out a lot of potential financial fires before they even occur. Failing to plan, no matter what aspect of your business is concerned, is planning to fail, so don’t underestimate the huge importance of preparing a budget plan.

Why exactly is having a budget plan so important? Because it helps you control your finances, instead of letting them control you. It keeps you in check, so that you don’t overspend and put your business in debt. With a properly developed budget plan, you will always know exactly how much money you are working with, where your cash flows and how much money you need in order to achieve your goals and run a successful business.

Read on to explore the key tips and steps to take to draw up a good budget plan and turn your business into a lucrative one that will consistently bring you positive results.

Where to Start?

First, you need to account for your fixed and variable costs to determine how much money you will need in order to cover all your expenses and actually generate both revenue and profit.

Your fixed costs include your rent (if you rent your office space), phone and Internet bills, employee salaries, the costs of all your tech, legal and accountant fees and the money you need for marketing your business. Your variable costs are utility costs, sales commissions, raw materials, direct labor costs and overtime.

When you know how much you will need for your costs, you need to carefully project your revenue. Generate revenue forecasts for your sales activities on a monthly, quarterly and yearly basis and use your data from the previous year to make a smart and realistic projection. This will help you know how much money you should spend on a monthly basis, so that you can effectively control your finances.

You also need to consider your gross margin profits, which is the amount of money you have after paying for all your expenses. You could waste a lot of money if your expenses exceed your revenues, and your gross margin profits will give you an insight into whether or not you’re wasting money on products and services that don’t really help your business grow.

Market Research

Market research will greatly help you draw up an effective budget plan. First, you should research the costs, so that you don’t happen to get off track due to some unexpected expenses. For instance, if you make an estimation of the money you will need for the raw materials needed for production and you later find out that the actual costs are much greater, you will not generate real profit.

You should also research the industry trends to make sure you keep up with the standards. It’s vital that you research the prices of products or services you offer, so that you can determine the best prices for both attracting customers and seamlessly operating your business.

Market research will definitely help you not get caught off guard, so don’t take it for granted.

What Are the Key Points to Focus on?

Your actual income and your actual expenditure are the two key points you should focus on when budgeting for your business. Remember that creating a budget plan is not a one-time job – you should review and revise it regularly, so that you can ensure it’s effective and helps you achieve your goals.

You should review your income and sales budget every month to analyze and compare them in order to determine what led to particular shortfalls or high turnovers. That way, you’ll set your budget accurately and take proper steps for generating more revenue.

Reviewing your actual expenditure on a regular basis will help you create more accurate and reliable cost forecasts, so be sure to regularly check your fixed and variable costs and analyze the changes.

How Much Wiggle Room Do You Have?

You need to allow for some wiggle room in order to have complete control over your finances in case of some unexpected expenses, especially because economic trends tend to change a lot. Create a financial contingency plan that will help you effectively deal with any potential setbacks, so that your projected revenue and profit don’t get negatively affected.

This is why you should develop a savings plan when drawing up your budget, as that will help you keep your business operating properly during the rainy days. Set some money aside for late payments and include in your contingency plan a risk assessment and a proper plan for potential underperformance that will help you minimize any potential losses and reduce your costs.

Clearly Defined Goals Are Easier to Achieve

Perhaps the most crucial factors that can make or break your budget plan are your goals. Without clearly defined business goals, you won’t really know how to plan your budget, because you won’t have a clear understanding of what exactly you are trying to achieve.

You need to know where you stand and where you see your business in a year, because only then will you be able to understand what steps will take your business there. The best criteria to apply when defining your goals are the so-called SMART criteria.

This acronym for Smart, Measurable, Attainable, Relevant and Time-Bound goals is the golden rule for setting the goals that not only will truly contribute to your business growth, but that will also be easier to achieve.

There are quite a lot of reasons why many businesses fail, but one of the most common ones is poor budgeting, or not establishing a budget plan at all. Therefore, if you want to run a successful business and keep your finances in check at all times, making sure that your revenue exceeds your expenses and that you actually generate real profit, make sure you carefully prepare a budget a plan and review it on a regular basis.