Business

A Guide to Budgeting Best Practice (part one)

18 October 2022   |   13 Minute Read
Two colleagues discussing work and budgets
Two colleagues discussing work and budgets

The dire economic outlook, signified by rising inflation and energy prices, means you must reassess your budgets. If only to check if the budgets and associated processes remain fit for purpose.

Running out of cash, after all, is perhaps the biggest reason for businesses failure. The gloomy economic climate only worsens this risk.

In this three-part series, we’ll provide you with all the essential info you need to support your budgeting requirements, alongside demonstrating how the use of Soldo can support and streamline your processes.

How often should I budget?

At a minimum, it’s good practice to budget once a year. This usually consists of a 12-month period, in line with the financial year-end of companies. Budgets can span multi-year periods. However, it becomes harder to predict revenues and costs further into the future. Longer periods are less likely to be useful.

Larger businesses with a multi-company group structure are likely to budget every quarter due to their size and complexity.

Projections must be realistic and achievable to motivate employees toward reaching company goals.

Monthly budgeting may be required for companies at risk of running out of cash. You may choose to do this internally or may be asked to do so by your investors or lenders.

Revenues and costs to include in budgets

Revenues

Revenues are one of the most critical elements to include in budgets as they demonstrate growth. However, they are also the most challenging category to forecast.

You need to take into account seasonality. A common example is e-commerce and retail companies likely seeing a spike in demand during the last quarter of the calendar year, as Christmas approaches.

Where possible, break revenues down into different line items to further analyse product lines and service types. Digital businesses should split revenues out into one-off purchases and subscriptions, for example.

Cost of sales 

Cost of sales are the direct costs of producing goods associated with generated sales. These costs should move up and down in line with revenues so that the profit margin stays relatively constant.

If you sell physical goods,  you need to include stock costs sold, as well as any expenses incurred getting them to the end customer. For example, this may include shipping costs to customers and labour related to modifying goods to get them into finished condition.

Digital businesses that can track marketing activity directly to sales (such as through affiliate links) will recognise this in the cost of sales category, too.

Operating costs 

Operating costs include all other expenditure in the business. Unlike cost of sales, these are relatively similar month on month and do not change based on sales volumes. However, they can change if you are expanding or contracting and need more/less/extra staff or move into larger/smaller premises.

Standard operating costs relevant to all businesses include rent, salaries, utilities and software licences.

How long should budgets take to prepare?

The time it takes to prepare a budget will depend on several factors. This includes the size of the business and the availability of supporting information.

Businesses with just a handful of employees are likely to be able to put budgets together relatively quickly. The finance director and owner can manage this between each other. For micro-businesses, budgets can be completed in just a few hours.

Larger companies with departments need more time due to relying on line managers for input and information. In these instances, budgets may require a few iterations before getting signed off. This is usually due to the finance team challenging line managers on their assumptions. This can make the process drawn out, so may require a few weeks to finalise.

Having efficient processes in place can also save significant time. For example, using automation-led spend management platforms will take up less internal resources than relying exclusively on Excel.

Get Organised

For large companies, you should assess supporting data and insights from relevant staff members. This will help make budgets more accurate, as well as save time. The only way to manage this (unless you want to spend your days, running from department to department) is through tech.

We’ll cover this in more depth in the next piece in this series.

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