Business Budgeting 101 - Learn the basics of business budgeting

welcome back to the clar CFO group Channel we have officially entered budgeting season and with that I want to make sure that I'm equipping you guys with a lot of information to help you through your budgeting process I call budgeting season Q4 of any year and sometimes people will start the budgets a little bit earlier and sometimes they won't do it until after the New Year starts but I highly encourage you to think through this process in Q4 or whenever your fiscal year is so most of us are going to start our fiscal year in January and end it and December so Q4 in our situation would be October November and December this is a really great time to think strategically about the coming year and also put together your financial plan so if that sounds good please stay tuned and if you aren't already subscribed to the channel I would invite you to subscribe to the channel and also check out our sister channel the new Financial Clarity podcast Channel you can check that out as well we have a new podcast that's available on all the podcast platforms and it is called Financial Clarity because that's what we like to to do here we will have a couple clips from the podcast here available on this channel but mostly those conversations are a good bit longer and we get more in-depth into things so we're going to keep those on a separate channel so you can opt into those if you would like and then um we will keep this channel to have a little bit shorter videos and more informative stuff do software walkthroughs do we'll talk about all sorts of things Finance kind of what we have been doing in the past and we want to keep doing that on this channel we just want to offer you guys another potential resource that can help you in your small business through the podcast all right so if that sounds good you can go check that out and let's talk about budgeting because that's what this video is about so really budgeting Q4 it's a really good time to do it but I think it's important to maybe think about why would we budget you know I know I've talked to tons of business owners as I've been providing CFO services and one of the questions we have in any of our intake or our discovery conversations is do you have a budget and then the second follow-up question is if you do have it do you use it and you know a lot of times most people don't have it and this is I keep in mind these are businesses that are you know seven eight figureure businesses sometimes don't always have a budget so if you don't have one don't feel bad it doesn't mean that you know you can't get started with a budgeting process or anything like that and and then the second part of that is do you use the budget because sometimes people have a budget but it's just kind of a process that they do and then they never look at it so that's not what we want the reason we have a budget is so that we can put together a realistic financial plan of the future 12 months okay and I like to budget for the future 12 months some people might do longer term budgets but budgets are really they start to get really loose the further you go out into the future because you you know there's a lot of cost you can't necessarily predict we would kind of do forecasting a little bit more looser for much longer than a year but really a budget um we wouldn't want to go out much more than like the future year okay we budget so that we can have a plan and also that like the business the way that it's been running that we can see if it's financially going to work okay and then we can kind of understand like okay well if we're not hitting our profitability goals we need to make some tweaks on maybe this line item of expenses or we need to look into payroll and see where we can save some money or we need to figure out how to get our supplies for a little bit cheaper you know you can start to make decisions ahead of time before you get to a month and you're like wow I don't have any money I don't understand what's going on that's why we budget so we can think about things before they become a problem what is a budget really practically so a budget is going to look like your profit and loss statement for the most part but it's going to look like the future months okay so if you are we're in September right now so we might take our financials from January through September and then look and then project out you know through December of the next year and so that would really look like we're going to put a it's this going to probably look like a spreadsheet you guys unless you're using a software like QuickBooks or giraff or um you know other types of budgeting software and I'm going to walk through actually those in future videos that show you how to create a budget in QuickBooks how to do a budget in Excel and if you want to I can even do how to do a budget in giraff but I haven't dabbled in giraff on this channel just yet we use it internally but it's something that I'm thinking about for the future so let me know if you're interested in Gira in the comment section below a budget is really going to look like a set of numbers for the future so whatever your Revenue was in the past you're going to project what you think and put in the budget what you need to make your sales in the future whatever you've been spending in the past on payroll you're going to put that in of what you think you're going to be spending in the future for payroll and you're literally going to go line by line through your profit and loss statement and plan so the deliverable when you're done with the budgeting process should look like kind of a spreadsheet or some type of financial plan for the next 12 months where you can kind of see what are sales what does profit look like what do the expenses look like and you need to see all of that sometimes people confuse goals with with a budget you know hey we want to make a million doar and we only want to spend $800,000 and that means we're going to have a 20% profit margin and we're going to make $200,000 that's great but you need to break down where are you spending that $ 800,000 how are you like where is that million dollar coming from and that's why it makes more sense to kind of break it down into like realistically what are we going to take in in January what are we going to spend in January what are we going to take in in in February what are we going to spend in February and you can break that out across um the future months okay so then you can see is that goal really realistic okay how do we use a budget so a budget is to be used to help guide decision-making it's kind of the budgeting process happens like once a year at the beginning of the year but you should be kind of paying attention to it throughout the year you should be able to say okay you know I want to do this thing with my employees they're asking to get trained on this one potential software tool for example and maybe that's a training they have to go somewhere for you can look in your budget and say okay do we have enough in the budget for this training maybe you had like a blanket budget cuz you know you're always going to trainings and things like that or maybe this wasn't planned for and you need to think okay well where can I pull some money from because maybe sales have been slower than expected and then you need to make sure that you're not overspending on these sort of ad hoc decisions that come up throughout the year and so the budget can kind of keep you in line a little bit like think about like think about if you're using a a budget well it should be kind of a little bit like the bumpers on um like if you go bowling and you put the bumpers in it should kind of be able to sort of keep you from going too far off one way or the other now that's if you're religiously using your budget like that you can be like okay well we didn't bring in what we thought on Revenue so we actually have to cut some expenses here or there or maybe if you are bringing in enough on the revenue side then that gives you a little bit of extra wiggle room on the expense side to make sure you're still hitting your profit targets so that's kind of like practically using a budget when a decision comes in you need to refer to the budget to say like can we afford it or you know is this something that we need to pull from another category or is this something that we need to wait on maybe it's just a matter of maybe not yet is sometimes the answer when we're looking at our budget and making decisions a lot of times it's like that might be something we really want to invest in but let's not invest yet let's actually wait 2 or 3 months to see if some of our other things are actually going to materialize before we make that decision and I think another nice thing about a budget is that it can also be the bad guy in a situation um sometimes people like to have a escapegoat when they have to say no to something so having a really firm budget can actually give you a very clear answer to say NOP it's not in the budget we can't do that this year okay so when you when you actually have your financial plan you can actually have something to point to to say yeah we can't do that right now rather than just you know saying for whatever other reasons you can't do it you don't want to be disappointing your employees but it is nice to kind of have a collective reason that if everybody is trying to abide by a budget then you know everybody needs to abide by the budget so that can be a helpful little piece of a budget as well so let's talk a little bit about how you would go about creating a budget so you would definitely want to find your prior financials so your past 12 months or past year year and a half of profit and loss information and then it is good to have a balance sheet on hand too just to be able to look to see if there's anything else you need to put on the budget that um might show up on the balance sheet like I'm thinking specifically if you need to buy some additional equipment and you need to plan for whether or not that's going to be an asset or if it's going to be an expense you can put that into the budget I like to always when I'm pulling the financials I always like to have a balance sheet available but really your profit and loss is going to be the thing that you're going to lean on the most your balance sheet is going to come in a little bit more when it comes to cash flow forecasting and planning for cash flow but I like to have both of them just as a reference point if you need to um check out your balance sheet while you're going through the process another thing that you're going to need is any kind of sales projections so if you are just going to say hey we're going to grow 10% over last year that's okay that's one way to do it but if you have anything that's a little bit more dialed in a little bit more nuanced a little bit more tailored to actually what's happening in the business in January what's happening in the business in February what's happening in March what targets do we have for those months that can be really helpful because sales are always the the hardest to budget for and so if you are doing that work ahead of time and really planning your sales thoughtfully you're going to want to put that into your overall budget you don't necessarily want to put your like pie in the sky like stretch goals into your budget because I would make sure that you have a conservative sales number that you believe you can actually hit don't put those big stretch goals because you don't want to be making decisions on like really kind of lofty sales targets okay so I would always say make your budget a little bit more conservative and that way if you you know do really hit those stretch goals and whatnot that just gives you a lot of extra room to be able to you know maybe invest more or you know make some of those decisions make some additional Investments throughout the year but I would not put you know your your most enthusiastic salesperson that they think they can sell to everybody in the world like don't necessarily use their sales projections like make sure that you're taking them down into reality and also really like what is very achievable those numbers should be going into the budget the next thing I would consider when you're planning your budget is your strategic plan for the next year so if you know let's say that you really want to be investing in marketing this coming year and maybe you're going to be redoing your website or maybe you have a big new software implementation things like that that are kind of more um strategic things that you're trying to do and improve the business overall make sure you consider those things in your future plan and in your budget because the prior Year may not have those expenses to look at so a lot of our prior year expenses are going to be like yeah a lot of that stuff is continuing into this year but your strategic plan is probably going to include some things that you've never had in the budget or never had in your financials before so you need to think about okay like what is the cost of that website redesign what's the cost of that new software implementation do we need to hire Consultants to help us do that software implementation do we need new equipment you know you know there's lots of questions that might need um to be asked in order to put that the numbers to kind of those strategic initiatives if you will and then another thing to think about is that if you have really large teams you might try to do some departmental budgeting so maybe certain departments might have be in charge of certain line items on the p&l so um they might have individual budgets that need to roll up into kind of your master budget as well so that's so some things to think about as you're pulling together your budget for the coming year another question that I get a lot is just like why how do we use it and then how do we report on the budget and our progress so there's a report called the budget versus actual you've probably seen that before and you would try to get your budget into some sort of system so ideally it would be in a system like QuickBooks or giraff or some other you know I don't I'm not sure if zero has a place to put in a budget I think they do I'm not totally sure I don't use zero very much to be honest um but if you have a system that you can put your budget into it's very easy to run a budget versus actual off of those systems if you don't you can run a budget versus actual just through Excel you can use some formulas and things like that to make it a little bit easier sometimes it's a lot more manual to do it that way but there are ways to do budget versus actual so that's one of the best things you can do if you have a budget is to look at your bud budget versus actual every single month your budget versus actual is going to reveal to you whatever you thought was going to happen were your assumptions correct and it's going to reveal if you're just you know doing things left and right and you're not really Consulting your budget at all it's going to make you kind of bring to light very quickly when you start to see those variances so it would have your actual minus your budget and then the difference and then you can even do a percentage difference so you can see like well how far off were we so I would highly recommend doing a budget versus actual review every single month when we do this with with our clients we make notes about like why was the each item off so Revenue targets were off because we didn't get that client that we thought we were going to get or um maybe clients weren't you know coming on at the pace that we thought they were going to or maybe um with since we didn't spend as much on or didn't get as much revenue maybe we save a little bit on payroll so we can kind of look at some of the the correlations and when something doesn't happen it's probably going to affect something else in the p&l as well so it's a really great way really analyze what's happening in the business what do we need to plan for differently do we need to revise like our rolling forecast which we're going to talk about rolling forecasts too so stay tuned and make sure you're subscrib to the Channel all these things like you can really see like what were my assumptions correct yes or no what do I need to plan for differently in the future and it's really just like a really great feedback tool to have that budget versus actual reporting okay so that's kind of high Lev budgeting 101 hopefully that was helpful to you please let me know if you have any budgeting questions in the comment section below I am going to be talking a lot about budgeting over the next couple months I know a lot of you have been requesting budgeting videos I've seen many a many a comment and I don't know why I haven't done very many I do have a training available a full like hour and a half I believe training I call it profit planning so that is available if you want to check that out but we're going to be talking about a lot of budgeting over the next couple months so definitely make sure you're um tuned in to the channel and watch out for our weekly videos all right well thank you guys so much for being here if this was helpful please give it a thumbs up it would help me and help the channel and um let me know if this is a helpful video for you so thank you so much for being here talk to you guys [Music] later

Channel: Clara CFO Group

Views: 10,227

Keywords: how to budget, budgeting for beginners, budgeting tips, budgeting basics, budgeting 101, how to budget for business, business budgeting, small business budgeting, small business budget, create a business budget, why budget, why have a budget, how to use a budget, how to make a budget, how to make a budget that actually works for you, business budgeting 101

Id: ELddtcZouP0

Length: 15min 56sec (956 seconds)

Published: Thu Oct 12 2023