Happy Sunday!

I hope everyone enjoyed the shorter work week and was able to reflect and relax on Memorial Day. I spent part of Saturday and Monday at a younger cousin’s baseball games which was a blast. It was sectional time so it’s win or go home. He also hit a homerun on Saturday that my oldest boy got to witness which was AWESOME!

This week I wanted to do a little bit on budgeting. I recently was speaking with someone about why I find it important to establish a budget and stick to it. This isn’t just information applied to businesses, but can be applied in your personal finance journey as well. While this may be tailored for business discussion/guidance, you can 100% take a lot of this information below back into your home and make changes.

If you want more personal finance updates and information to help you improve your position, I suggest giving Knocked-up Money a read! They send information out to help those looking to put a little money in the bank and save!

Creating and maintaining a budget is a critical task for any new business owner or leader. A well-constructed budget not only tracks income and expenses but also forecasts future cash flow and identifies areas for cost savings. This week’s edition of The Bottom Line will help you understand the importance of budgeting, how to develop a realistic budget, and how to maintain it effectively.

Why Budgeting is Crucial for Business Success

1. Financial Control: A budget provides a detailed view of your financial situation, helping you control and manage your business finances effectively. You’ll have a clear understanding of where your business is at any given time.

2. Decision Making: It aids in making informed decisions by highlighting your financial capabilities and constraints. When you have data that’s not just looking in the rear view mirror, but forward looking you can make decisions each week to maximize your cash position.

3. Planning and Forecasting: A budget helps forecast future cash flows and plan for upcoming expenses and investments. What does your current forecasting look like? One area I specialize in is helping develop cash flow strategies or the use of a 13 week cash flow. This is not a document that has to be super complicated! Let’s simplify it to what fits your business or personal needs.

4. Performance Measurement: It allows you to measure actual performance against planned targets, identifying areas that need improvement. Analyzing performance monthly is important for those not seeing expected profits. Where were you supposed to be, where did the business land, and how do we adjust the next month to be above plan?

Steps to Create a Realistic Budget

Creating a budget involves several steps that require careful planning and accurate data collection. Here’s a step-by-step guide to get you started in the right direction to becoming a more cash efficient business or family.

1. Gather Financial Information

Start by collecting all relevant financial information such as the following.

• Income Statements: Details of your business’s revenue and expenses over a specific period.

• Balance Sheets: A snapshot of your business’s assets, liabilities, and equity at a given time.

• Cash Flow Statements: A record of cash inflows and outflows within your business.

These documents provide a baseline for understanding your current financial status and how things are trending.

2. Estimate Revenue

Projecting your revenue is the next crucial step. Base your estimates on historical data if available, or industry benchmarks and market research for new businesses. Consider factors such as the following to help you out.

• Sales Trends: Analyze past sales data to identify patterns and trends.

• Collections: Review how much money is being collected per month and the timing in which this cash is hitting the bank.

• Market Conditions: Consider current market conditions and their potential impact on your sales.

• Seasonality: Account for seasonal variations that might affect your revenue.

3. Identify Fixed and Variable Expenses

Categorize your expenses into fixed and variable costs. These costs should all be projected and listed out on your cash flow planning document, such as a 13 week cash flow planner.

• Fixed Expenses: These are consistent and recurring expenses such as rent, salaries, insurance, and loan payments.

• Variable Expenses: These fluctuate with your business activity, such as raw materials, utilities, and marketing expenses.

Accurate categorization helps in understanding which costs are controllable and which are not. Make sure if you manage a 13 week you are updating which specific days these expenses will be incurred. This helps with cash planning for all future weeks and your current week.

4. Forecast Future Cash Flows

Forecasting future cash flows involves predicting your future income and expenses. Use your revenue estimates and expense categories to project monthly cash flows.

• Seasonal Variations: Adjust your forecasts for seasonal fluctuations in sales and expenses.

• Growth Projections: Incorporate your business growth plans into the forecast.

• Contingencies: Plan for unexpected expenses or changes in revenue.

5. Identify Areas for Cost Savings

Regularly reviewing your budget helps identify areas where you can reduce costs. Look into spending that is not necessary and make sure your team is not exceeding spending limits for non-critical business needs.

• Inefficiencies: Identify and eliminate inefficiencies in your operations.

• Negotiation Opportunities: Negotiate better terms with suppliers and service providers.

• Cost-Effective Alternatives: Explore cost-effective alternatives for essential services and products.

Maintaining Your Budget

Once you have created your budget, maintaining it is crucial for ongoing financial health. Here’s how I’d approach maintaining this and not letting it get behind.

1. Monitor Actual Performance Against the Budget

Regularly compare your actual income and expenses against your budgeted figures. This helps identify variances and understand their causes. Use this information to better perform in the coming months. Suggest a monthly check-in here.

• Adjust Projections: Update your forecasts based on actual performance. Once a month is closed you should update actuals to compare against plan.

• Take Corrective Action: Implement corrective actions if you are deviating significantly from your budget. Take a step back and do some analysis if things are not lining up as expected.

2. Update the Budget Regularly

Your budget should be a dynamic document that evolves with your business. Update it regularly to reflect the most accurate possibly scenarios. Those utilizing something like a 13 week should update this normally on a weekly basis. If smaller in operations, monthly would suffice.

• Changes in Business Conditions: Adjust for changes in market conditions, regulatory environments, and economic factors.

• New Opportunities and Risks: Incorporate new opportunities for growth and potential risks that may arise.

• Performance Feedback: Use feedback from your performance monitoring to refine and improve your budget.

3. Use Budgeting Tools and Software

Leveraging budgeting tools and software can streamline the budgeting process. These tools offer features that help you see things through a different lens. What tools have you used in the past or currently are using that others may want to know about? Leave a COMMENT on this post and let us know!

• Automated Calculations: Simplify calculations and reduce errors when software is utilized vs manual updates.

• Real-Time Data: Provide real-time updates and insights. Normally you can pull this reporting out easily and quickly.

• Reporting and Analysis: Generate detailed reports and analysis to support decision-making. Automate, automate, automate!

Tips for Effective Budgeting

To ensure your budgeting process is effective, keep the following tips in mind and make sure your team also understands the ultimate goal of why you are establishing and working on a budget. This helps control unwanted spending when team members are aware of the need for cost savings.

1. Be Realistic

Set realistic and achievable targets. Overestimating revenue or underestimating expenses can lead to cash flow problems and financial stress. There’s always going to be issues that arise in business and we can’t always plan for everything, but make sure you are consistent in your approach to what will likely actually happen.

2. Involve Your Team

Involve key team members in the budgeting process. Their insights and perspectives can help create a more accurate and comprehensive budget. This, in my opinion, is very important. You are going to get perspectives on situations that you may not think about which can be a game changer for you.

3. Stay Flexible

Be prepared to adjust your budget as needed as mentioned above. Business environments are dynamic, and flexibility is key to adapting to changes. Weekly changes are going to need to happen to keep the budgeting process running smoothly and on track.

4. Focus on Cash Flow

Cash flow is the lifeblood of your business. Prioritize managing your cash flow effectively to ensure you can meet your financial obligations. Cash is king. When you aren’t prioritizing making sure cash coming in the door timely that can really hurt a business. Email me at [email protected] to setup a time to discuss how we tackle any AR/Collection issues you are facing.

5. Plan for the Long Term

While short-term budgeting is important, don’t lose sight of long-term planning. Consider your business’s long-term goals and incorporate them into your budget. This is where a 13 week cash flow can come in handy. Not only does it give you information over the next few months, but we can extend that forecast out over the course of a year. Can be done fairly easily, so let’s discuss it!

Creating and maintaining a budget is a fundamental aspect of running a successful business. By developing a realistic budget that tracks income and expenses, forecasting future cash flows, and identifying areas for cost savings, you can ensure your business’s financial health and stability. Remember to regularly monitor, update, and adjust your budget to stay on track and achieve your business goals. With careful planning and disciplined execution, budgeting can become a powerful tool for driving your business forward.

If this is something you want to explore more of with Guernsey Consulting, I’d be thrilled to sit down and discuss options. Whether that’s developing your budget process, maintaining cash flow analysis, developing 13 week cash planning or establishing other details of the budgeting process I am ready to help. 👇

Please consider voting on this week’s edition of The Bottom Line so I know if it’s helpful to you!

If you enjoyed this week’s newsletter please consider sharing this with others! I’d love to be able to get this in front of an additional thousand individuals in June!

You can read more of our posts through the link below which will take you directly to our Blog page!

Are you someone who reads about AI and how that can impact your business or team? If so, check out Simple AI and the information they are sharing!