When should I create a budget?

You want to operate your business with less uncertainty and stress. A budget is a simple yet effective way to plan for your company’s future. When should you create a budget? This article discusses three common scenarios where budgets can be the most useful. 

When planning for the next year

You may be asking yourself, “If I know how much I want to spend, why do I need to write out a budget?” The short answer is that planning is always beneficial. Getting the numbers out of your head and on a budget reduces stress. In addition, it will keep you from forgetting important things.

Before the new year is a great time to sit down and budget. Numbers can be estimated by month, by quarter, or any other time frame that makes sense for the timing of your business. 

Start by estimating your revenue for the year. After this, you can begin calculating the expenses you expect on a recurring basis. These costs include direct costs, payroll, supplies, inventory, insurance, and any recurring administrative expenses.

Look at financial information from prior years to aid in estimating unforeseen expenses. Do costs increase at a certain time of year? Is overtime a factor in certain months? Perhaps there is a rate increase for your insurance or other costs. Now is the time to plan for these adjustments to be prepared. 

When you have multiple departments

Many small businesses use separate departments to manage daily operations. This structure can be beneficial in keeping the company organized. It also makes tracking income and expenses more complex.

Creating a budget for each department in your organization can be very helpful here. This is particularly true if multiple departments purchase similar types of expenses. For instance, if your business has a marketing, sales, and finance department, you can plan a budget for expenses they share in common, such as office supplies, meals, or travel. 

Setting up budgets for this type of structure also provides the opportunity for department heads to be included in the planning process. They have first-hand experience with the operations in their department. They can provide the best estimates of how much revenue their department will generate and how much they will need to spend. Involving them in the process gives them a greater sense of control and improves communication within your organization. 

When planning a project

Many lines of business, such as construction, have multiple projects in progress at once. A great way to keep your business from becoming overly complicated is to create a budget when starting a new project. This will also allow you to track the profitability of each project in addition to the company as a whole.

As you begin your new project, break it up into phases it will take to complete it. Each phase may have its own supplies, contractors, permits, payroll, and so on. The sum of the cost of each step will be the amount you’ve budgeted to spend.

Setting up your budget before beginning a project is an important step. This is a good time to compare your budget to what you estimate to make in revenue for the project. This will ensure the project is feasible and financially sound. 

These are just a few of the situations where a budget could be useful. There may be others. Overall, any situation involving advanced planning could be improved by using a budget. Interested in learning more tips to help you with your business budgeting? Check out this article sharing additional business budgeting tips.