What Will It Take for You to Be More Profitable This Year? 0

Posted On April 5, 2022, by Admin

Most business owners don’t run their business on a budget. What’s more, according to financial studies, small businesses are less likely to have a budget and/or formally document it.

Business owners don’t seem to consider a budget to be necessary. Many doubt a budget could foresee market fluctuations and believe it’d only limit their business’ growth. However, experts claim that disregarding the importance of a budget can be extremely detrimental to your business.

This article will explain the significance of including a budget in your business plan template. It will discuss what your budget should include, cover the steps of budget-building, and reveal the importance of regular budget revisions.

Why Is Building a Business Budget Important?

We can compare a business budget to a map you carry when going on a trip. You’d lack aim and be much more likely to lose your way without it. A budget serves the same purpose in the business world. It affects more than just your business expenses or revenue.

A budget gives your business plan a clear goal, marks a path you need to tread, and scales your business. It shows your team what to focus on and allows it to create and agree on better and more feasible short and long-term plans and goals.

A budget also helps you establish your challenges and determines how urgently you need to attend to them. It keeps your finances in check and helps you decide your next move. Additionally, it helps your business stay on track, grow steadily, and increase your profits.

Finally, a budget helps you analyze your financial progress. Even if you exceed it, you can calculate when and why that has happened. As a result, you can make apt adjustments to your future plans and develop more effective strategies to increase profitability.

What Should a Business Budget Include?

Many entrepreneurs who run a business on a budget don’t consider all components a budget plan should comprise. Your budget should cover more than just the revenue your business generates. So, let’s take a look at everything your business budget template should include.

Estimated revenue

This revenue represents an estimation of the income you expect your business to earn from selling products and/or services over a fixed amount of time. You can calculate your estimated revenue in two ways depending on whether you have a start-up or an established business.

• Start-ups have no financial data to look back on, so they have to analyze the industry averages for information. This data should provide them with sales targets that represent their future aims.
• Established businesses should calculate their estimated revenue based on financial data from the previous year, accounting for their anticipated growth at the same time. The combination of these elements should help them develop fairly well-defined sales targets.

Revenue should be budgeted by major revenue stream, product, sales by geographic region, or some other reasonable metric that is useful to you. The reasoning for the detail is to be able to compare it to your actual results.  Variances need to be reviewed and understood as changes to the budgets original assumptions and hypothesis may need to be considered.

Fixed and variable costs

Fixed costs do not change or fluctuate depending on your sales volume. You must include them all, so don’t hesitate to ask your suppliers for quotes or check your historical numbers. Variable costs are often driven by fluctuations in sales or production.

• Fixed costs include rent, utility bills, bank fees, equipment leases, software subscriptions, employee payroll, outsourced accounting services, etc.
• Variable costs include inventory and raw materials, product packaging and shipping expenses, sales commission, contractor fees, marketing and advertising expenses, one-off capital costs like computer or furniture purchases, expansion expenses, research and development costs, production wages, etc.

Profit

This component represents the difference between your estimated revenue and your expenses. Your goal should be to increase your profitability, so you might have to make adjustments from time to time. You can control the target profit margins by changing other components of your budget. For instance, you can reduce your expenses or raise your prices.

Steps to Building a Business Budget

Your budget plan must be realistic for your business to benefit from it. We’ve outlined a few simple steps below to help you set such a budget.

• Check the industry standards— If you’re running a small business, you might be more susceptible to changes in the industry. So, it can be extremely useful to check the industry standards to determine how much you’ll spend on different cost groupings. You can gather information from the internet, the CRA, Industry Canada and local business owners.
• Establish a budget planning calendar— As you might know, small businesses tend to be volatile, so making an annual budget plan might not be the best idea. Many small business owners make budget plans for just a month or a quarter ahead to ensure they can keep up with the market and make necessary changes on time. It is really beneficial to have a rolling 12 month budget.  As each quarter ends, the next three quarters are reviewed to ensure assumptions are still relevant, and the 4th quarter budget is then developed.
• Factor in unprecedented changes — You cannot precisely determine or predict plenty of things in your budget plan. Good examples include your revenue growth, certain expenses, or market fluctuations. You need to factor in any potential changes in your expenses by setting enough money aside to cover them.
• Be prepared to cut costs— You might have to cut some of your costs and allocate your funds elsewhere. Your budget plan should reflect those needs. For instance, you can save money by changing suppliers or servicer providers or waiting until the start of the new billing cycle to make purchases.
• Rely on last year’s figures as a guide— If you’re an established business, you can learn a lot based on the data from the previous business year or period. This data can shed light on your past mistakes and indicate the changes you can expect in your competitive environment. Both should affect your business budget planning going forward.

Execution and Monitoring

Creating a quality budget plan is only a job half-done. You also have to execute it to the best of your abilities and monitor your performance.

You can do this by regularly reviewing and revising your budget, especially if your business is growing. Economic changes, payroll demands, or unexpected expenses might force you to alter your initial plan. If you check and modify your budget frequently enough, you could:

• Manage your cash flow
• Seize cost reduction opportunities
• Identify your short-term goals more successfully
• Increase revenue
• Predict future costs more accurately
• Build your future budget plans more precisely

Your revisions should consist of comparing your actual finances to your budget amounts. In other words, you should analyze the differences between your actual income and your sales budget and your actual expenditures and your expenditure budget. You’ll achieve the best results if you work closely and consult with your accountant or bookkeeper.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns.  We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.

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