One of the most important steps in getting business spending under control and improving overall financial health and profitability is to create a solid budget.
But creating a budget isn’t about just setting a limit on how much you can spend.
You need to consider aspects such as future growth plans, current spending behaviors, and high-level organization goals.
In this article, we’ll walk through the steps involved in budget planning, exploring why budgeting is important and its place in managing cash flow.
What is budget planning?
Budget planning is the process of creating an expectation for business spending over a specific period. Often, that period is the coming financial year, but it's also common to break annual budgets down into quarters and months as well.
Creating a budget is about designing a financial roadmap that outlines your expected income, expenses, and resource allocation, helping you manage cash flow, set priorities, align spending with strategic goals, and create accountability within departments.
Why is budget planning is important?
Budget planning can be a resource-intensive process. So, why invest the time and effort in the first place?
Here are six important benefits that businesses receive from creating a budget.
1. Provides financial clarity
A well-thought-out budget helps all department leaders and stakeholders understand how the business as a whole is investing its revenue and helps create clear spending limits in each category.
2. Helps achieve business goals
A good budget takes into account the company’s high-level objectives, baking them into its spending plan.
For example, if one of the company’s goals is to increase new customer acquisition, you’ll see this reflected in spending on sales salaries and commission as well as marketing.
3. Improves resource allocations
A well-defined budget helps us understand how to allocate resources.
It guides decisions such as whether to invest in refurbishing an existing store or opening a completely new one, for example.
4. Assists in accessing funding
Businesses can use their budget as one of many financial documents that assist in winning over investors and accessing business funding.
Investors want to know that you have a clear plan for earning and spending and that your business is adept at sticking to it. A history of budgets and actuals can help demonstrate this.
5. Prepares for unforeseen circumstances
Try as you might to create a detailed spending plan, unexpected events often arise.
The economy might tank, impacting your revenue generation ability. Or you might experience a flash flood and incur some cleanup expenses.
Whatever the case, a good budget planning process takes into account the possibility of unforeseen circumstances and creates contingency plans, allowing financial leaders to react quickly with an appropriate Plan B.
6. Encourages healthy spending habits
The budget sets up the foundation for spend management, the practice of monitoring and controlling business spending.
It sets expectations to stick to and helps stakeholders like department leaders decide when and where to spend and when to hold back, making sure they stay within the established spending limit for each category.
The role of budget planning in managing cash flow
Budget planning plays a crucial role in cash flow management.
It provides a structured approach to tracking and forecasting both income and expenses and helps businesses allocate their resources effectively and in a way that’s aligned with business goals.
By sticking to the plan, businesses can maintain sufficient liquidity to meet operational needs, a key goal of cash flow management.
Additionally, monitoring actual income and expenditure against the budget can help to identify periods of cash surplus or shortfall in advance, allowing finance leaders to make proactive decisions, such as adjusting spending, securing financing, or investing excess funds.
Steps to create an effective budget plan
Getting ready to create your own budget plan here? Here are the key steps you need to follow.
Assess your current income and expenses
Start by reviewing the current state of affairs.
How much is your business earning? What revenue sources are driving this income? What about expenses? Categorize spending by both department and expense and analyze trends over the last few financial periods.
Set financial goals and priorities
Then, turn your attention to the goals and priorities your business has for the next financial period.
If the goal is to expand and scale at all costs, your budget will look very different from how it might appear if the objective is to grow a little but cut back heavily on spending to maximize profit.
Estimate future income and expenses
In the third step, you’ll engage in a bit of forecasting.
The trends you identified in step one will help here. For instance, if revenue has grown 20% year on year for the last five years, it may be reasonable to assume the same will be the case for the coming period.
It's aIt's important to consider any pending investments or growth initiatives. For example, if you’re opening a new branch next year, this is likely to bring with it a lot of capital expenditure, but may not yield any revenue in the financial period for which you’re planning.
These plans need to be taken into account as you build the budget.
Allocate resources and plan for contingencies
Now that you’ve forecasted and estimated revenue for the period and considered any large expenditure and historical trends in spending, its time to allocate resources across different spend categories.
For example, if you anticipate earning $1.2m in revenue next year and aim to retain a 20% profit margin, you’ll have $960k left to divide across the likes of marketing, operations, administration, sales, and so on.
Track and adjust the budget plan as required
Creating the budget is one thing; monitoring actual spending and sticking to that budget is another.
That’s where budget tracking comes in.
You’ll need some form of budget management software solution — we’ll dive into this shortly — and a cadence for reviewing the budget. Monthly is probably a good bet for most businesses, though larger corporations with slower cycles might set the budget review process at a quarterly interval.
Here, you simply review actual spending against the plan and make any adjustments required, such redistributing additional income, tightening up on excessive spending, or reallocating budget from one category to another.
Tools and resources for budget planning
There are many great tools and resources out there that can support better budget planning.
Here’s a quick overview of the most common software categories that will come in handy:
- Spreadsheet software. Basic tools like Microsoft Excel or Google Sheets can be suitable for small businesses that want to keep spending low.
- Budgeting software. Solutions like BILL offer automated features for tracking income, integrate with accounting tools, and can even help you set spend controls.
- Accounting software. Tools like QuickBooks and Xero are great for monitoring spending and integrating with your budget and financial management tool.
- Cash flow forecasting. Solutions like Float, Pulse, and BILL can assist in planning and monitoring cash flow to improve financial stability.
- Educational resources. Books, webinars, and courses on financial planning (e.g., Profit First by Mike Michalowicz) can help improve your understanding of budgeting principles.
Drive better budget planning with BILL
Corporate budgeting can be a tricky and complex affair.
You’ve got to balance financial goals, economic circumstances, and real-life spending behaviors, not to mention the expectations and desires of several department leaders.
Make budget planning faster, smarter, and easier with BILL.
Our powerful budget management software helps you set customizable spending limits, give employees different levels of control, and monitor business spending across different categories in real time.
With BILL, you can also access business funding for funding growth initiatives, use virtual cards to improve spending security and catch budget overages quickly.
