Most finance experts know a business budget is essential to building a great company.
Surprisingly, a survey by Clutch revealed that 61% of startups don’t use a documented budget to manage their finances.
Whether you’re building a lifestyle business or the next great unicorn, a budget gives structure and order to the spending and can aid in your decision-making processes. A budget review is necessary to validate your business’s goals and align spending with your current situation.
Additionally, an optimized budget can help businesses improve profits by assisting companies in identifying potential areas for improvement.
In this article, we’ll provide guidance on reviewing and optimizing your business’ budget so that you can ensure that your budget matches your goals.
Understanding the Business Budgeting Process
A business budget is a detailed plan for future operations. It outlines how much revenue you plan to make, what you plan to spend, and how much will remain at the end.
The business budgeting process begins with identifying your short, medium, and long-term goals.
From there, you can identify all necessary expenses and nice-to-haves, prioritizing the optional items based on the value they will bring. Finally, estimate all potential revenue sources. These can come from sales but don’t have to, as investments, grants, and loans also bring cash into your business.
Aiming high is one thing, but set realistic goals and targets during budgeting. Objectives that don’t fit your current position and trajectory may demoralize and harm the company.
Assessing the Current Business Budget
The process of budgeting is an ongoing activity. Once you have established a budget, you must monitor your performance and ensure that actual performance remains within acceptable limits.
The following are some actions to take when reviewing your business budget:
- Gather and analyze financial data. Financial data comes from several sources, including monthly financial statements, bank records, and tax returns. Look for trends and variances that may indicate adjustments to the current budget.
- Identify and understand budget variances. Gaps may indicate underperformance or an over-optimistic budget. For example, higher expenses in marketing could come from higher sales from pay-per-click ads that work well. Or maybe the team is overspending.
- Evaluate the effectiveness of budget allocations. Assess whether you’re properly allocating resources and getting the highest returns possible.
Identifying Opportunities for Optimization
There are many ways to optimize a business, but only a few core levers to pull. Improving your bottom line requires higher sales, lower costs, or better investment opportunities.
Evaluating Cost-saving Measures
Reviewing your budget is an excellent opportunity to find cost-saving measures. This evaluation can be as simple as comparing your current operations with similar operations in your industry. You can also pick out your largest categories or line items and consider if you could get the same results and spend less.
Reviewing Revenue-generation Strategies
One thing most people know from their business and private lives is that you can only reduce costs so much, but revenue has no limit.
Optimizing revenue requires a review of the strategies you’re currently using and exploring growth opportunities. Revenue increases come from price increases to current customers, adding new customers, or selling current customers more products.
Assessing Investment Opportunities
Assessing potential returns on investment may be the most crucial factor, but it’s also difficult to quantify. Every company is unique, so you can’t just look at what someone else is doing and assume you’ll get similar results.
When evaluating potential new projects, be critical regarding feasibility and conservative on your estimated return on investment.
Making Adjustments and Setting Priorities for Your Business Budget
Consistently reevaluating and adjusting your budget requires input from all relevant stakeholders. Consider their feedback when you modify the budget but ensure it aligns with your current strategic objectives.
If the market or the company has changed, your old goals may no longer fit. This mismatch means re-prioritizing your budget allocations based on your revised goals and targets.
Monitoring and Reporting Your Business Budget
The first step in monitoring and evaluating your business budget is establishing a system for ongoing evaluation.
Review your budget regularly and be open to adjusting as needed. Establish a schedule for regular review and updates of your budget, at minimum quarterly and more frequently if necessary.
Periodic reports highlighting variances, like budget vs. actual analyses, can help you track your company’s progress toward your established goals. These can help you assess if you’re on track or need a course correction. You can use these reports as benchmarks for future budgets and compare actual and planned performance over time.
Team Communication and Collaboration
When it comes to budgeting and forecasting, effective communication between departments is vital. Ensuring that the right people are involved can help you achieve better results.
Collaboration between departments can also help you optimize your budgets and allocations by encouraging cooperation and ensuring all stakeholders agree regarding financial goals and objectives.
Utilizing Tech and Tools for Your Business Budget
Modern budgeting software technology can help you simplify building a business budget and comparing your actual spending. These tools can also help you leverage automation for budget tracking and analysis while ensuring that your financial data is always accurate and up-to-date.
Cloud-based budgeting solutions offer advantages and benefits, including real-time updates, easy collaboration, affordability, and scalable solutions.
Work with an Optimized Business Budget
Things change quickly for a growing business, and your budget can quickly become outdated. That’s why it’s crucial to review and optimize your spending and targets regularly.
The experts at Founder’s CPA work with many startups in multiple industries, so we’ve seen a lot of budgets. Contact us today to start optimizing your company’s budget.