A Small Business Approach To Annual Budgeting

January 10, 2022 by Calvin Wilder in Articles

If the words “annual budgeting” tend to leave you groaning and sighing, you’re not alone. This phrase has sent many a small business owner into a tailspin of dread over the responsibility. Truthfully, though, it has nothing to do with how complex or challenging the process really is—and everything to do with a lack of knowledge about how to manage the task effectively.

Whether you’ve never had to create an annual budget before or you’re concerned that the business has taken on a more complicated financial reality, the idea of tackling this task may seem daunting. Even so, the process is integral to supporting the financial health of your business. To help you navigate your small business’s annual budget, here are some valuable insights from the experts.

Why does annual budgeting matter to small businesses?

Proper budgeting is fundamental for businesses of all sizes, setting the stage for financial spending and aiding in the plans for effective cash flow. For a small business, annual budgeting is even more consequential, as it helps owners understand some critical aspects of their financial decisions and create a path to healthy financial performance. With small businesses in particular, there’s usually less latitude when it comes to financial matters, and making every penny count is essential to success.

In essence, annual budgeting matters to small businesses because it creates the initial structure to employ critical business improvement practices, such as:

Following a plan to spend within your means in the interest of avoiding unexpected problems with cash flow that can swiftly break the business.
Anticipating future expenses and identifying where you might need to spend money down the road.
Projecting future earnings and getting valuable insight into the level of income your company can expect along the way.
Setting and tracking toward important business goals.
Conducting effective analysis by comparing your projections to actual expenses so you can make adjustments as needed.
Examining your performance indicators and accurately determining what’s driving revenue.
Accounting for future growth and evolution of the business based on a well-informed, well-planned financial strategy.

What’s involved in a small business’s annual budgeting process?

The key to streamlining a small business’s annual budgeting process is understanding the elements involved. At its core, the entire exercise is about plotting how and where you’ll be spending money over the course of the next year by assigning all of your expenses a projected dollar amount.

Below are the specific elements a small business must aggregate to begin mapping out the annual budget:

Estimated revenue, or how much you expect your business to generate in a year’s time (based on a previous year’s numbers or a review of comparable businesses).
Fixed costs, which are the expenditures your small business can reliably anticipate and generally includes items such as rent, utilities, equipment, insurance, salaries, consistent hourly pay or other relatively static expenses.
Variable costs, or those that could shift based on your company’s output. Think about expenses like raw materials, shipping and handling costs, production costs, commissions and variable credit card fees.
One-time costs for anomalies or non-recurring expenses (e.g., office furniture, a company vehicle, a specific machine, etc.).
Cash flow going in and out of your business over the course of a year so you can track whether you’ve got enough money on hand to pay the bills and keep the business running smoothly.
Profits, or the amount of money your business makes after accounting for costs and expenses.

To create the official breakdown of these numbers, it’s necessary for small businesses to work from an annual budgeting template. This usually looks like a spreadsheet that contains a row for each element described above, with columns dictating annual projections from year to year.

How do forecasting and analysis fit into the picture?

As you continue budgeting each year, you’ll assimilate the data that enables your business to forecast more accurate projections. And with a consistent annual budgeting process supported by well-informed projections, proper business analysis can be conducted.

By examining your budgeted vs. actual expenses, you will learn more about what works in your business, which will help you make smarter decisions in the future and start making changes that can improve your business. You’ll have the tangible insight to cut unnecessary costs where they are appearing, as well as make a targeted effort to maximize profit margins.

What is zero-based budgeting for small businesses?

A small business’s annual budget is often created by taking last year’s results and making small changes to the expense lines for the next consecutive year. But if there are major performance gaps to close, or you’re looking to maximize shareholder value, there’s another approach that can be incredibly valuable for a small business.

As the name suggests, zero-based budgeting starts from zero—not from last year. And although the theory can involve quite complicated equations, the concept boils down to one essential question: If we started from scratch to build an ideal structure and team for achieving the business’s longer-term objectives, what would we choose to spend money on, how much, and why?

In this case, ALL expenses must be justified every budget period. Doing so forces you to consider the business’s return on investment. Whereas the alternative is about putting a dollar into your own pocket, this approach focuses on spending that dollar wisely. A major benefit of zero-based budgeting for small businesses is the exercise’s prompting to rebuild the business. So aside from promoting financial discipline, it stimulates strategic thinking about the overall business model.

Is there annual budgeting support for small businesses?

CFOs are typically the ones tasked with creating and analyzing the business’s budget to anticipate future expenses, understand how the company is handling its spending and make decisions that positively affect the bottom line. But for small businesses, having a dedicated CFO with the capacity to manage all of these responsibilities isn’t realistic—and often they fall to the owner.

That’s why some of these businesses opt for outsourced support or fractional CFO services. With this option, your business can fulfill its annual budgeting and related CFO responsibilities while benefiting from broad experience and objective fiscal insight, all without the added cost of talent acquisition and unnecessary administrative expenses. If annual budgeting is becoming a drain on your time and resources, consider this option for your small business.