In the first part of our Ask An Accountant – How To Budget For Your Business Series, we took a look at what a business budget was and what every great business budget should include.
Today, we take a look at why you need a business budget, what happens when you exceed your budget and much more.
Why should I have a budget?
Budgeting is the basis for all business success. It helps with both planning and control of the finances of the business.
If there is no control over spending, planning is pointless, and if there is no planning, there are no business objectives to achieve.
The benefits of budgeting should never be underestimated when running a business:
- Budgeting estimates revenue, plans expenditure and restricts any spending that is not part of the plan.
- Budgeting ensures that money is allocated to those things that support the strategic objectives of the business.
- A well-communicated budget helps everyone understand the priorities of the business.
- The process of creating a budget provides opportunities to involve staff, resulting in them sharing the organization’s vision; and
- Engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.
If you are running your business without a proper budget, you may find that you’re actually just running around in circles and not meeting your long-term goals.
By taking the time now to set a budget, you will free up time in the future and give yourself the best chance of achieving the rewards you want for your hard work. Furthermore, having a comprehensive budget is a requirement for obtaining business loans from financial institutions or seeking investment from outside investors.
What if I exceed my budget?
Although no one plans on it, going over your budget can happen.
There is a wide range of reasons why your company’s budget might not line up with reality. Some of those reasons might be beyond the control of anyone in your business. Others might be a direct result of decisions made by you or your employees. If you have exceeded your budget or get the sense that you are about to go over budget, here’s what you can do.
1.Review your budget:
The first step to getting back on track, if your business has gone over budget, is to take a closer look and figure out why it has happened.
Examine your company’s estimated expenses and projected revenue and compare them to your actual numbers. You should be able to clearly see the difference between your projections and reality.
Once you’ve spotted the areas of discrepancy, figure out what caused the overspend.
For example, if you’ve spent more than expected on utilities, ask yourself why. It might be that there was a municipal rate increase, which you didn’t expect. It could also mean that your business may have been busier than expected, resulting in longer work and production hours.
Going over budget, in certain categories, can also point to an issue that needs to be fixed.
If your electricity regularly costs more than anticipated, your company should think of ways to reduce its energy usage. That can mean powering down all items that do not need to be used overnight to ensure that you are saving on the energy costs.
Although it is possible that you went over budget because of too much spending, another issue might be that your company didn’t earn as much as it anticipated.
Take a close look at your revenue to determine why your numbers might be lower than expected. It could be that your sales team isn’t as strong as you thought or that demand for your product has dropped. It might just be that you were too optimistic about your company’s earnings potential.
Once you’ve spotted where the issue in your budget is, it’s important to figure out if it is a one-time problem or something that will recur.
For example, if the municipality has raised its rates, that will result in a recurring budgetary issue. If the higher electricity bill in one month was due to excessive air conditioning use, you could make adjustments to avoid a similar problem in the future.
2. Put together a new, improved budget:
After carefully reviewing your current budget and its issues, the next step is to assemble a new and improved budget.
However, you don’t want to completely discard your previous budget. It might be that some parts of it are still usable. Plus, you need the information on your original budget to help you shape your new one.
Figure what you’ll do to compensate for going over budget in any one category.
If you need to allocate more of your company’s funds to utilities, for example, look to see if there is a category where you underspent and pull funds from that.
For example, you might budget R5 000 per month for petty cash but find that your team only ever uses R1 000 per month. In that case, you can pull some funds from that budget category over into the utility category.
If your company goes over budget because it’s not earning enough to cover its expenses, you’ll want to figure out a way to increase revenue or adjust your budget to take into account a lower amount of income.
Finding ways to increase revenue, such as by hiring a more experienced salesperson or by expanding your market, can also increase costs, which you’ll need to include in your budget.
If going over budget is a regular occurrence for your business, it might be time to get some extra help. Working with an accountant can help your company see where it’s going over and what changes it needs to make to reach its goals and to avoid busting its budget.
Find out how you can create a contingency budget, how to incorporate scenarios and other useful budgeting tips in part 3.