How to Effectively Create and Manage a Business Budget

Last Updated: 

June 21, 2024

As a new small business owner, there are so many aspects of your business that you need to worry about, such as the well-being of your employees, your relationship with your suppliers and your customer experience. However, there is nothing quite as concerning as managing your business budget, especially if you have little experience in the complicated world of finance. 

Whether you are already seeing the effects of not managing your business budget or you are worried it will come back to haunt you in the not-too-distant future, the following guide is just what you need to get on the right track - and stay on it!

Key Takeaways on Creating and Managing a Business Budget

  1. Understanding Business Budget: A business budget is a financial plan that sets the limit for costs and investments over a set time, usually a year. It involves collaboration with CFO, directors, and heads of departments.
  2. Universal Importance: Whether a new startup or an established enterprise, creating a business budget is crucial. It provides control, tracks performance, forecasts future trends, and attracts funding or investors.
  3. Reasons to Budget: Business budgets serve various purposes, including funding operations, ensuring future control, tracking performance, forecasting, attracting investors, identifying leftover funds, and providing valuable data.
  4. Creating a Budget Strategy: Start by checking industry averages to allocate funds effectively. Set realistic financial targets, analyse all costs meticulously, and communicate with department heads for their input.
  5. Incorporating Departmental Input: If your business has different departments, collaborate with their heads to gather predicted costs and targets. Ensure clarity in budget allocation to each department.
  6. Drafting the Final Budget: Create a clear and comprehensive final budget that encompasses forecast spending, business costs, and planned activities for the year ahead. Make it easily understandable for all departments.
  7. Active Budget Management: The job doesn't end with creating a budget; actively review it monthly, consider outsourcing financial management if needed, and establish clear expense policies to control employee spending.
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What is a business budget?

A business budget is a type of financial plan that sets the limit for costs and investments over a set time, typically a year. In most cases, the chief financial officer (CFO) will work alongside other directors and heads of departments to review proposed budgets for the year ahead. 

As mentioned above, most business budgets are carried out annually, although adjustments can be made throughout the year if needed. Typically, a business budget is set around the time of year-end close. In the United States, this tends to be in October, and in the United Kingdom, it is in April. 

Why is a business budget important?

It doesn’t matter if you are an established enterprise or a brand-new business; a business budget is essential for all. While small businesses may not have to budget for different departments, they still need to set an overall budget for the year ahead. 

Some of the most notable reasons why a budget business is important include:

  • To determine if there is enough money to fund operations and generate revenue operations
  • To give control over the business and its future. 
  • To track how your business is performing from one month to the next. 
  • To forecast for the next month, year, etc. 
  • To secure funding or attract new investors. 
  • To highlight leftover funds that can be invested. 
  • To provide valuable data and insights. 

How to create a business budget 

If you have never created a business budget before or you have but it was not detailed enough, the below basics are just what you need:

1. Check industry averages 

For new businesses, it can be a good idea to check the industry averages before you get started on your budget. This allows you to see what other similar companies spend over the course of an average year and is typically shown as a percentage of revenue.

Industry averages can help you to allocate funds and make every penny of your budget count. 

2. Set targets 

Next, you need to set your financial targets for the year ahead. Do you hope to perform the same as the previous year, or do you predict sales to be higher? If it’s the former, you could set the same budget as the last year. However, if it is the latter, you will need to adjust your budget accordingly. 

Make sure you are realistic with your predictions for the year ahead, as you don’t want to say, “We aim to grow profits by twenty per cent,” if this is highly unlikely to happen. 

3. Analyse costs 

You now need to determine the exact costs of running your business in the year ahead so that you can ensure there is enough money in the budget to cover this. Make sure you consider the possibility of employee raises, budget increases and any new cost centres. 

With this step, it is better to be over cautious than it is to underestimate. 

4. Communicate with department heads

If you have different departments within your business, you need to communicate with the heads of each one to identify their predicted costs and targets for the year. Basically, you need to sit down with anyone who has access to their own budget. 

If someone wants to increase their budget, make sure they have a sound reason for doing so, such as a need for an increased marketing budget due to more competition. 

5. Draft the final budget

Now is the time to draft your final budget, and this should include all the forecast spending, business costs and any planned activities for the year ahead. Your business budget should be clear and easy to understand so that each department can see how much they have to spend and can start deploying their tactics. 

How to manage your business budget 

Once your business budget is complete, this doesn’t mean you can now sit back and relax. As a business owner, you need to be actively controlling all money coming in and out and safeguarding the budget so that you can achieve your targets. A great option would be Implementing spend management software as it provides real-time insights and control over expenses, ensuring financial goals are met efficiently.

Here are some great tips for managing your business budget:

Review your budget monthly 

Although most businesses set an annual budget, it is still a good idea to review it once a month to see if any adjustments or changes are needed. For example, if any new information is brought to light or new employees are hired. 

Consider outsourcing 

If you do not have an in-house team of financial advisors and you are struggling to manage your business budget on your own, you may want to consider hiring an outsourced financial controller such as ORBA Cloud CFO Services

By outsourcing this task, you can get help with financial budgeting, cash flow, reporting and so much more. 

Set expense policies

Many businesses struggle to manage employee expenses and this can wreak havoc with their business budgets. To keep on top of what your employees are spending on entertainment, transport, food and accommodation, you need to set out clear policies for each category. 

This will help you to maintain control of their spending and ensure your employees feel confident spending company money. 

What to do if you go over your business budget? 

If you go over your business budget, the most important thing to do is to remain calm and not panic. Depending on the size of the problem, you will need to look into different areas where you can make cutbacks, such as discretionary staff spending. 

If the problem is bigger than anticipated, you might have to make bigger cuts, such as to your advertising and marketing budget. 

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