As the crazy year of 2020 begins to come to a close, your business is probably beginning to think about what the next year might have in store. Taking inventory of your current financial situation and thinking about where you want to be in the future will help your business identify its best path forward.
Financial planning is something that many business owners find difficult, and this year’s volatile economy has made forecasting even more challenging than usual. Finding the right balance between ambitiously pursuing growth and conservatively planning for more volatility can be extremely difficult.
If your business is finding itself overwhelmed with its current financial situation, there’s still no need to panic just yet. With the right guidance, resources, and information in hand, you’ll be able to position yourself to have a productive fiscal year.
In this article, we will discuss some of the most valuable things to keep in mind when creating a budget for the upcoming year. Though no amount of planning can completely resolve the uncertainty that comes with running a business, there are still several things your business can do to effectively prepare for the future.
1. Hire an Outsourced Accountant of Fractional CFO
While it is natural to want to maintain total control of your business’ books and finances, it is important to remember just how many resources there are available to support you along the way. Outsourced accountants and fractional CFOs can help your business create a budget that is both realistic and capable of empowering your business to make better decisions.
Even if your business is extremely small and has a simple revenue and expense model, taking just a little bit of time to meet with an experienced ecommerce accountant can be very beneficial. They’ll help answer your questions, generate multiple forecasts/projections, and help you find ways to reduce expenses or limit tax obligations. Additionally, they will also help you stress test your business to ensure you’ll be able to weather another potentially volatile year.
2. Take Time to Learn Your Budgeting Software
The saying “work smarter, not harder” has become a bit tired in the business world, but nowhere is this mindset more needed than in the world of accounting. Today, there are seemingly limitless types of accounting software that can help make your most important responsibilities—such as budgeting and statement generating—significantly easier. Taking some time to learn your accounting software’s shortcuts, features, and capabilities will ultimately make the entire budgeting process run much more smoothly.
3. Look at Last Year’s Budget for Guidance
Past data is one of the most useful resources for creating future data and, unless this is your first year in business, it is important to recognize that you already have a wealth of useful information immediately available. Looking at last year’s budget is a great way to get an estimate of what you can expect things to cost and, perhaps more importantly, it can also help you gauge just how accurate your estimates really are. If you were way off with your predictions last year, it might be time to revisit how you construct your budget.
4. Be Conservative with All Estimates
While being realistic is obviously key while making your business’ budget, it is always better to err on the side of caution and assume things will cost more than you originally predicted. After all, it is much better to end the year having spent much less than you initially anticipated (and have money in your pocket as a direct result) than to find yourself facing an unexpected financial crunch. In some cases, a “bottom-up” approach to cost estimating might be most beneficial.
5. Classify Costs and Revenues
On your income statement, your business should have all of its expenses and revenues clearly identified. But unless your business has an extremely simple structure, you’ll want to do some additional clarification. Distinguishing fixed expenses (things you must pay regardless of what occurs) from variable expenses (costs that scale with the growth of your business) can help make it easier to identify opportunities to improve your bottom line.
6. Compare Your Budget to Others in Your Industry
In the accounting world, it can sometimes be difficult to determine whether your business—at least financially speaking—is exactly where you need to be. At times, you might feel that you are completely falling behind, only to later realize that you were one of the businesses in your industry that was able to turn a profit. In other instances, you might feel as if you are miles ahead of your competitors, only to discover that your overhead costs are completely out of control. Both of these situations can decrease financial efficiency—to get a gauge on whether you are moving in the right direction, compare your budget to others in the industry (when possible).
7. Get Input from Employees
Even if you like to think you are in complete control of your business, there is only so much you can know or see at any given point in time. Rather than handling the budgeting process entirely on your own, take a moment to get some input from one of your most valuable resources: your employees. Asking about priorities, cost-saving opportunities, and ways to make your operations more efficient will often help you save significant amounts of money.
8. Revisit your Budget Throughout the Year
Your business does not exist in a vacuum, and neither should your budget. While having a budget in place to start the year is great, you’ll inevitably need to make some changes along the way. This was especially proven to be true in 2020 when COVID-19 caused a “surge of financial distress in the business sector.” Whether on a quarterly, monthly, or even weekly basis, don’t forget to take a look at your business’ long-term plan and evaluate your best path forward.
Budgeting is an important part of running any business. If your business has changed or you’ve never created a budget before, you might be unsure where, exactly, to begin. But with these helpful tips in mind, your business can make the appropriate changes and still have a very productive year.
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