IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Eric Moore of Accounting Solution Partners (https://www.theaspteam.com/):

Six Essential Steps to Create a Company Budget

Budgeting is considered a necessary evil in many organizations.

​Business owners and executive leadership understand the value of establishing and maintaining a financial plan to guide business operations.

However, they often feel constricted by these plans as well. Finding the balance between protecting funds earmarked for key functions and restricting opportunistic purchases is always a challenge.

And yet budgeting is one of the most important strategic functions businesses can use to drive growth. As Victor Butcher explains, “The bottom line on why to draft a budget for your business is that it will help you figure out how much money you have, how much you need to spend, and how much you need to bring in to meet business goals.”

New businesses need a formal budget as much, if not more, than more established organizations to be profitable. During startup and subsequent periods of transition, budgeting regulates spending to:

• Minimize risk
• Keep organizations disciplined
• Set benchmarks to track performance over time
• Spot problems early
• Identify available opportunities
• Create a growth roadmap
• Secure financing

While some companies simply find a sample budget online and plug numbers into a template, other organizations understand the value of thoughtful sequential budgeting. Equipping employees at all levels to be part of strategic budgeting sets high-growth businesses apart from their competitors.

Well-executed budgeting requires six essential steps:

1. Understand Income

As the adage states, “You can’t spend money you don’t have.” For that reason, the first step in budgeting is determining the company’s income to set a foundation for the rest of the process. While income may seem like a straightforward figure, this initial step snares many business owners.

New companies do not have historical data to utilize, which leaves them with no other choice than to forecast revenue numbers. However, good budgeting requires an honest assessment of income potential. Therefore, the income base figure should reflect what an organization will make, not what it wants to make. Inflating income potential is a serious mistake than can result in overspending.

For established businesses, income should cover sales as well as other income sources such as:

• • Investment income
  • Rental income
  • Bank account interest
  • Sale of obsolete equipment
  • Loan interest

Income should also be forward-looking, including anticipated upcoming pricing changes to analyze what the effect will be on sales figures.

2. Determine Fixed Costs

Fixed costs remain the same regardless of sales and, as such, are typically easy to include due to their predictability. The most common fixed costs for an organization include:

• • Rent/mortgage
  • Utilities
  • Employee salaries and benefits
  • Website hosting
  • Bank fees
  • Government fees
  • Property taxes
  • Business insurance
  • Accounting and legal services
  • Depreciation

These fixed expenses should be backed out of income to provide an accurate picture of available funds.

3. Add Variable Expenses

In the same way, funds for variable expenses should be set aside as well. Variable expenses are correlated with sales, which means that they can be scaled up or down according to business needs. The most common of these types of costs include:

• • Direct materials
  • Production supplies
  • Sales commissions
  • Marketing/advertising
  • Transportation
  • Travel/events
  • Credit card fees

While inexperienced budgeters will sometimes stop at this point, savvy leaders understand the value in forecasting additional expenses as well.

4. Forecast Upcoming Costs

Accurately predicting one-time costs preserves the integrity of your budget amidst large capital expenditures. Upcoming costs may include the purchase of:

• • Building/property
  • Technology/software
  • Office furniture
  • Office supplies
  • Employee bonuses
  • Vendor gifts
  • Moving expenses

While some of these expenses are much larger than others, not accounting for them in advance when budgeting can sap available funds from other items. Taking an intentional approach to including these expenses in the period in which they are expected to be incurred is vital for protecting the budget from significant cost swings.

5. Formalize the Budget

Once a budget is created, it should be reviewed and amended as needed to make it conservative enough to preserve funds for key functions. Expected costs are one area that can be altered to provide more responsible estimates of business needs in the coming quarter or year.

Changes to the budget can also be made in the planning stage to hit profit goals and reinvest additional funds into the business. For instance, planned purchases can be delayed and profit margins can be increased to meet business objectives.

When completed, an accounting software or tool can formally pull the budget together, making it more presentable and easier to use as a template for subsequent iterations.

Even after the budget is formalized, it does not need to remain static. Should circumstances change substantially, the budget can be revised as the quarter or year goes on to reflect new information.

6. Generate Approval

Traditionally, finance and accounting teams are responsible for maintaining the budget. However, modern organizations tend to shift ownership of the budget to the business at large.

The objective is to garner buy-in at all levels of the company through transparency.

However, the budget should not simply be distributed to all employees, it should be integrated into the business culture. Cultivating an understanding of why a budget is important and how it can enable business growth is vital to transforming employee perception around budgeting. While budgets are typically viewed as something constricting, leadership and their teams must learn to see them as a path to achieving strategic goals.

A budget should guide every business expenditure, no matter how small. But managers should spend within the budget, not to the budget. Using available funds regardless of need creates an environment of overspending and waste. Instead, the stigma associated with leaving budgeted remainders on the table should be removed and leadership should be rewarded for thrifty use of the budget.

If you need assistance with creating a budget for your business, we have a team available to give you the support you need.

If you have questions relating to the content of this article, Eric Moore of Accounting Solutions Partners would welcome the opportunity to answer them.  Mr. Moore can be reached at (425) 440-3770 or eric@asp-nw.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.