Budgeting Allocation Tips to Run a Smart Business
First, we need to learn which 7 steps we need to take in order to create a budget for a small business:
Collect all the information about your income and expenses.
Set realistic goals.
Pay attention to market conditions and seasonal expenses.
Make income and expense projections/estimates for the next year.
Design your budget by making allocations.
Put your budget plan into action.
Review and update your budget each month thereafter.
Now, we can talk allocation.
Budget allocations start with how much working capital you have on hand to use and then use reasonable income projections and estimated expenses for the upcoming year (or a longer budget period).
Underestimate Income And Overestimate Expenses
It is always wise to underestimate income and overestimate expenses. As a business owner, be sure to pay yourself; otherwise, you may experience a lack of motivation to continue. It is a sad state of affairs when the only person not looking forward to a payday is the business owner, who lives in fear of not making payroll.
Under the pandemic conditions, many small business owners felt intense financial pressure. Many businesses failed. Some barely survived. If your business is still operating, you have the chance to revisit the budget planning for the next year in light of what we recently experienced.
Build an Emergency Fund
Allocate at least 20% of the total annual budget to emergency expenses that you do not know yet what they might be.
The medium-term goal is to run the business so that you can put aside a full year’s worth of payroll that is held in reserve for when the next emergency hits.
Work With Key Employees On Budget Items
Key employees are a resource that goes untapped by many small business owners when making a budget. Owners should not be shy about engaging key employees in the budgeting process except for salary levels and employee benefits. Allocating line items in a budget for expenses should be subjected to rigorous analysis and scrutiny.
Business owners who have confidence in key employees can rely on their opinions about reducing costs without degrading the quality of the operations. Sometimes employees notice wasteful processes that the owners may not be aware of and can make positive suggestions about reducing the waste.
By involving key employees in the budgeting process, there is increased engagement in operational efficiencies. An excellent program to consider is a rewards program based on the savings for a company created by the implementation of an employee’s idea. For example, a company might offer an employee a 10% bonus calculated from the amount of the total annual savings created.
When employees feel engaged in the budget process, it feels less like something forced upon them and more of a collaboration in running the business smoothly. Through the budgeting process, employees learn the reasoning behind the budget allocations and what is expected of them. By aligning the employees’ goals with the overall business goals, an owner keeps everyone focused on achieving long-term success.
Understanding Risk
Risk is about unknowns. There are things we know and things that are unknown. Some unknowns can be estimated, such as the cost of rebuilding if a fire burns down the business. Those risks are mitigated by using insurance.
Other unknowns are things that we do not even consider. These are business interruptions called a “black swan.” Many small business owners, impacted by the pandemic, had little idea in 2019 that for most of 2020, their business would be shut down completely. Yet, many businesses experienced this.
To try to get insights into a black swan event, it helps to consider a thought experiment that I call “What if?” The way this thought experiment works is a business owner lists 100 things that can go wrong. Then, makes a contingency plan to deal with each one of them.
Examples of common “what ifs,” which affect all small business are the following:
What if an owner dies?
What if the business is sued
What if a natural disaster occurs?
What if a major customer goes bankrupt?
What if there is a sudden market shift?
What if there is a supply chain disruption?
What if the economy collapses?
What if an employee steals from the business?
What if the building cannot obtain credit?
What if sales decreases?
What if laws change negatively impacting the business?
Depending on the type of business, there are at least a hundred of these questions to answer. The answers need to be captured, recorded, and documented, and then used as an emergency response manual based on the clear thinking that can be done before a disaster occurs.
Do All the Business Activities Make a Profit?
It may sound silly to ask such a question; however, many businesses do not manage their efforts well enough to understand that the combination of efforts or lack thereof impacts overall profits. There may be a reason for a business to do something as a loss-leader (costing more than it is worth in the short term). However, a business operating in the negative with higher expenses than revenues is not sustainable over the long run.
Some business owners confuse revenues with profits. Sales may be up; however, if the cost of goods sold is higher than the revenues, more sales will not remedy the situation.
Getting Rid Of Bloat
Businesses tend to bloat over time. They become more wasteful than when running the company was more challenging on a limited budget. Ideally, all businesses should be able to determine from analysis what contribution to the bottom line comes from every activity undertaken by the business.
Non-contributing business efforts should be modified or discontinued.
Budget Allocations For Expansion
Businesses that grow thrive. Businesses that stagnate die. In every budget, there should be an allocation for expansion. If a business is making money, some profits need to be invested in the business to help it grow.
Time Allocations
A business owner may do well when making budget allocations of financial resources. Then, fail miserably when making time allocations. It is quite common for a business owner to underestimate the time needed to complete a project. It is also a common problem when the owner overestimates his or her ability to get things done. It is vital in the budgeting process to allow sufficient time to achieve a company’s goals.
A good rule of thumb is to take any time-based estimates of the worst-case scenario when everything that can go wrong does go wrong, and then double this amount of time.
A company that can survive such an extended delay will be better off if the project completes sooner. It is OK to hope for the best; however, it is better to plan for double the worst when it comes to the time needed to complete a project or initiative.
Sales Cycles
Most businesses have slow sales periods during a normal year. Using a straight-line budget allocation of the same amount each month is not an accurate way to analyze the inflows and outflows for these businesses. Instead, the sales cycles need to be considered. Also, it is wise to reserve funds during strong sales cycles to carry the business forward during periods of lower sales revenues.
Downtime can be used by staff to create future marketing campaigns. Customers can be encouraged to buy off-cycle by offering attractive discounts. This is how to sell air-conditioning units during winter.
To keep a company thriving, it is important to look for counter-cyclical revenue streams to offset each other.
For my example above, of a company selling air-conditioning units, that company should market heaters as well so that there are never any long periods of lower revenues while waiting for the seasons to change.
If seasonal sale cycles are unavoidable, then the budget allocations should reflex a severely reduced budget during periods of downtime. Keeping the costs low is helpful when the money is not coming in.
Regularly Review And Update the Budget
A budget is a tool that is best reviewed each month to see how well it is serving a business's needs. A budget is manageable by exceptions. An exception report shows individual budget line items that are outside of a range of normal fluctuations, such as plus or minus five percent from a budgeted figure.
- Compare month-to-month and year-to-year budget performance of the company
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Look for items that do not turn out as planned so that a future budget can reflect this if needed.
By regularly reviewing a budget and making appropriate adjustments, a business can stay on track, and the budget more accurately reflects reality. This makes it easier for a business owner to manage operations.
Consider past trends but do not necessarily rely on their continuation. Things change, and a budget reflects those changes.
Using the Goalry Tools
Budgeting for business owners is best accomplished by using the following Goalry Mall tools:
Cashry® to cover short-term emergency cash needs.
Debtry® to manage existing debts.
Creditry® to manage your credit history.
Loanry® to manage new loans.
Billry® to pay your monthly bills on time.
Budgetry® to manage your budget allocations.
And to improve your financial status, to build wealth, use the other Goalry Mall tools.
Use the Right Budgeting Tool. Meet Budgetry.
Conclusion
This methodology is how to make budget allocations based on the best practices used by small businesses that are very successful. Budgeting does not have to be a boring task. In fact, it is like having your finger on the pulse of the lifeblood of the business. By managing a budget using the Goalry Mall tools, you will have a better handle on your small business's financial health. Business owners who take a proactive stance in making budget allocations and engage the help of key employees in making sure the budget allocations are appropriate find that running the business is easier.