As a first-time small business owner, you must juggle multiple responsibilities that may seem unfamiliar. One of your key tasks is to create a budget, which can be intimidating in the early stages. However, you need a business budget to maintain your cash flow and generate profit.
There are different business budgeting methods, and choosing the right one is the first step to success. Your chosen budgeting method should help you make informed business decisions to maintain a healthy cash flow and reduce overspending. Here are some of the most helpful budgeting methods to kickstart your new business and boost your profits.
The incremental budgeting method is one of the most popular techniques used by businesses. The method involves adjusting the last fiscal period’s budget by an increment or percentage to acquire the new or current year’s budget. This simple method can be used for departmental budgets, project budgets, and salaries – if that activity has been performed in the past.
An incremental budget is an ideal choice for businesses that are established and positive that their budget will remain stable for the most part in the long term. If your start-up is relatively new, you might benefit from a different budgeting model, as your costs may fluctuate as you introduce your product to the market.
Zero-based budgeting is a method that starts fresh each year by assuming that all department budgets are zero and must be recreated from scratch for the new fiscal period. This method is a great way to determine key expenses and eliminate unnecessary costs. However, it is time-consuming, requiring business owners and accountants to explain every proposed expense each year.
The activity-based budgeting method analyzes business activities to forecast operating budgets and costs. In this method, “activity” refers to any action that results in expenses that you or your accountant can examine to improve company performance. You can enhance profitability by cutting back on cost-incurring activities, eliminating unnecessary activities, or reducing costs when possible.
Activity-based budgeting is an excellent choice for a new company that doesn’t have historical data required for other methods, like incremental budgeting. However, this method can be time-consuming and cost-inefficient for established businesses that don’t go through significant changes each year.
An efficient way to start your budgeting process is with budgeting software for small businesses that save you time and administrative work. An efficient budgeting software contains tools to help your business plan, forecast and manage finances, from simple spreadsheets and dashboards to highly sophisticated planning tools that auto-generate financial statements.
Value Proposition Budgeting
The value proposition method – also referred to as priority-based budgeting — is a middle ground between incremental and zero-based budgeting. This technique helps businesses eliminate unnecessary expenses by addressing expenditures to determine if their value rationalizes the cost.
This method involves three steps:
- Determine the company’s desired results
- Recognize the programs and services
- Designate resources to the programs
The value proposition method is best suited for businesses that are more conscious of their budget and want to eliminate unnecessary expenses. It allows the company to focus on customers, stakeholders, and employee needs.
Envelope budgeting is a method that tracks exactly how much money you have in each category per month by keeping your cash tucked away separately in a metaphorical envelope. This method gives you a clear picture of your cash flow and how each department performs. You can automate this process and save time and money using efficient budgeting software for small businesses.
The best business budgeting method for your company depends on how established your company is, your overall goals and your general preference. Use this guide to decide which technique can best elevate your company and help you forecast your profits and expenses better.