We all know how maps work. To get from Point A to Point B, we follow directions along a planned route. Wouldn’t it be nice if every plan was so simple?
In the business world, the closest thing we have to a map is the corporate budget. They’re so essential that you’d think that most corporate settings would use one. But the stats might surprise you:
- 61 percent of small businesses didn’t even have a budget as of 2018.
- According to the same source, smaller businesses are more likely to skip the corporate budgeting process. For companies with only 1-10 employees, 74 percent had no budget whatsoever.
- A U.S. Bank study found that more than 80 percent of businesses attributed their failure to lack of financial planning.
Running a business without a plan? It’s like starting a trip with no map. Creating a budget will help you identify problem issues, plan for future projects, and create a timetable for growth.
But how do you start the budgeting process if you have no idea where to take those first steps? Let’s tackle the entire corporate budgeting process from the ground up.
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Start for freeWhat is budgeting at the corporate level?
Simply put, a corporate budget is a nuts-and-bolts financial plan. Your first priority — figuring out the way you plan to spend and allocate your money. Think of it as a map for your cash flow.
What should this financial budget include? Here’s your simple rule — if you can measure it in dollars, it belongs in your budget. Let’s cover a list of must-haves that will help with your budget preparation:
Expense side
- Fixed expenses: These are the unchanging expenses you can predict from month to month.
- Examples: Payroll, commercial office space, software subscriptions.
- Variable expenses: These are necessary costs of doing business but not as easy to project.
- Examples: Costs of goods sold, merchant and credit fees, sales commissions, travel expenses.
- One-off expenses: Though one-off expenses are inherently not a part of your monthly business, you should always make room to account for them.
- Examples: Furniture, temporary hires, B2B services.
Income side
On the income side, you should track everything coming in, including gross revenues. Having this number in place lets you do the math on everything else.
The challenge? With any budget, you’re trying to project the income side. A budget isn’t a profit/loss statement on what’s already occurred. It’s a plan for what you will be doing with the money you take in. And since none of us have a crystal ball, we have to do the next best thing — create a budget the right way by using best guesses and estimates.
Steps for creating a corporate budget
Here’s something everybody should know about budgets. They won’t always work right away. Even Dwight D. Eisenhower — a famous planner if there ever was one — once said, “Plans are useless, but planning is indispensable.”
In other words, don’t beat yourself up if your first budget isn’t 100 percent accurate. Studies show that just about 50 percent of companies actually meet their budget expectations. 36 percent spend more than they planned.
Don’t fret if you spend more than your budget, either. It’s the process that creates the improvements. That’s why you should take individual budget process steps that incorporate feedback from the real world and let you adjust accordingly. Here’s what to do:
- Record everything. Predicting the weather isn’t easy. Recording it is. The first step in the budgeting process is looking to install the systems and platforms that measure incoming and outgoing money. If you don’t already have them, consider using tools like QuickBooks or Wave to automatically log every transaction.
- Examine previous months. Look at all of the financial documents you can get your hands on: bank statements, credit card statements, accounting software. Your goal here should be to come up with an accurate representation of what one month of financial activity in your business looks like. Think of this as the framework for your first budget.
- Involve every department. If you were a family or an individual, the first two steps might be enough to get started. But budgeting at management levels means you’re dealing with money across multiple departments. To make sure departments understand the process, you might even consider using a learning management system to educate team members on budgeting and get everyone on the same page.
- Align your budget with your strategy. A budget isn’t an end unto itself. It’s a means. It should align with your strategy to help you achieve your business goals. Involve the people at your company to set yearly goals, and use your budget to divide those goals up into smaller, achievable steps.
Different approaches to the standard corporate budget
What is a standard corporate budget? Trick question. There are multiple approaches to budgeting. The one you choose will likely depend on the type of business you run.
A flexible budget is one that leaves wiggle room for spending thanks to wiggle room in your income. As Investopedia explains, “With a flexible budget, budgeted dollar values (i.e., costs or selling prices) are multiplied by actual units to determine what particular number will be given to a level of output or sales.”
This is ideal for any business with inconsistent income. That’s especially true if some expenses (such as transaction fees) depend on that level of income. Think of it as a budget that bends one side of the ledger to the other.
A static budget can still work for organizations with inconsistent revenues, however. This model relies heavily on planned income and fixed expenses. For example, many nonprofits use a static budget model, trimming their expenses to meet a minimum threshold for donations.
You may also run into the term operating budget, which usually focuses on the day-to-day needs of a company, such as meeting the costs of goods sold (COGS). Long-term business debt, for example, might not factor into an operating budget. But if you have a company that needs to push through a certain amount of expenses every day to continue functioning — as larger companies do — it makes sense to plan for the free flow of cash.
How to use a corporate budget once you’ve created it
The process of creating a budget can be as simple as listing out your income and expenses, dividing them in an Excel spreadsheet, and punching in the numbers. And that’s certainly a start.
But if you want your budget to produce insights beyond hard data, here are some things you can do:
- Create a “rainy day fund” for extra wiggle room. Did you know that FEMA reports that 90 percent of businesses that don’t reopen just five days after a disaster end up failing within a year? As soon as you can, include a line item in your budget for a rainy day fund. At the very least, this fund will give you the budgetary flexibility you need to cover losses in future months.
- Include plans for adjustments. Rather than a map, think of your corporate budget as GPS. If you take a wrong turn somewhere, you only have to “readjust” and move forward. Schedule times for regular budget reviews so you can see what was accurate, what wasn’t, and whether the money you did spend was money well spent. Include budgeting as part of your employees’ development and you’ll find it might improve the state of your business.
- Find direct connections between investments and ROI. Let’s say you have a marketing budget that puts 50 percent of its money in advertising and 30 percent of its budget in content marketing. Yet 80 percent of your sales are coming through blog conversions. Does it make sense to maintain the status quo? A budget will help you identify areas of weakness and strength and re-adjust as necessary, so you’re investing your money in the right places.
- Don’t skip a month. A budget is a system for improvement, not a hard goal. If you don’t meet your budget one month, don’t use it as an excuse to say, “Forget it. Budgets don’t work.” Treat budgeting as a skill — and a skill your company can learn. To reinforce that point, you may even consider onboarding a learning management system for budgeting in your business.
Going beyond the numbers
We admit it. The phrase “corporate budgeting process for a company” sounds dry. It reminds us of tedious conference room meetings. It sounds like homework.
But here’s the truth — dry or not, it’s important. If you master your corporate budgeting skills, you’ll be amazed at what a solid plan can do to change the trajectory of your company.
Want to know more about how to turn budgeting into a skill, rather than merely a goal? Start your free trial of GoSkills today.
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