Oftentimes this is the time of year that businesses are working on their budget and planning and forecasting for the year. We work with many small businesses that use budgets and would like to share with you three tips that can help you with your budget. These are:
- Pay attention to your sales cycle
- Leave a cushion
- Review your budget periodically
Pay attention to your sales cycle
Paying close attention to your sales cycle should result in your being able to see trends. You should be able to identify the times when you have more revenue and the times when you have less revenue. Most businesses have sales cycles that can be predicted to some degree. Review your sales for the last 12 months (or multiple years, if available) to see if you can determine any trends.
Even if you are unsure of what your sales cycles are, you can use the current year as a time to track your sales cycle. By being aware of your sales cycle, you can prepare your budget accordingly, as your budget should reflect these cycles.
Leave a cushion
With any budget, you are somewhat guessing what your income and expenses will be. By leaving a cushion, or rounding down your expected revenue and rounding up your expected expenses, you allow yourself some flexibility. Expenses can change. Review last year’s revenue and expenses (or the last several years) to get an idea of what to expect. Make sure you leave a little room in the budget for any unexpected expenses.
Review your budget periodically
It’s important to review your budget periodically. Some budgets are determined by an outward source, such as a board, and can only be modified with approval. But other times budgets are for internal use only and are more flexible.
Be sure to review your progress with your budget by comparing it to the actuals throughout the year. Take note of how things are going so you can adjust the budget accordingly. Put a reminder on your calendar to review your budget at certain intervals throughout the year. We suggest for our clients to review their budget every quarter.
If you are new to using a budget, use the first year as a learning experience. Don’t expect perfection with a budget. A budget is a tool to help you. As you track your actuals to your budget, you will get better at making business decisions. Look at your budget before you make a commitment to something beyond an ordinary expense.
It’s important to look forward and not backward. Review your budget to see how it should change your behavior. Don’t beat yourself up if the budget doesn’t always work out exactly how you want it to. But be proud of yourself for working hard and making smart business choices.