There are many strategies on how to budget effectively. Here are some useful ways to get you started.
Prior to establishing a strategy for budgeting, it’s important to establish the funding options available for your small business. Do this by asking yourself a few questions about your business: Is the revenue your business is generating enough to sustain it, while also giving you the ability to reinvest for growth? Alternatively, do you require additional funding for future growth?
Small business loans are available from many financial institutions. In addition, Canada also offers a Small Business Financing Program, which provides up to $1 million in financing for purchasing or improving land, property, or equipment. Crowdfunding is yet another option to consider for generating new funding.
Once you have established your funding model, here are some considerations as well as methods for budgeting strategically.
One of the most important line items in your budget will be your staffing costs. To determine the ideal staffing composition for your small business, it’s important to correlate it with your business needs, such as coverage hours, number of clients to be served or number of orders to be fulfilled. Once you have established the staffing requirements, you will need to determine the correct mix for your business. For example, full-time staff versus part-time staff versus casual staff. Keep in mind, the salary and benefits package you offer should, at the very least, match the current industry standards for your business.
HISTORICAL MIX ALLOCATIONS
One of the most efficient methods of establishing a budget is to use a historical mix allocation approach. With this method, you are establishing the percentage mix of each line item within your budget. For example, if the training expense line item in your budget represented two per cent of your overall operating costs of the previous fiscal year, two per cent will be applied to your new annual budget to cover training costs.
To help ensure every line of your budget has been scrutinized and justified, implementing zero-based budgeting is an appropriate approach. Zero-based budgeting means that all expenses must be approved for each new period. It can be a very time-consuming exercise; however, the extra work could pay off as you will likely be able identify both savings and operational efficiency opportunities.
DISCRETIONARY VERSUS NON-DISCRETIONARY EXPENDITURES
Your operating budget will consist of both discretionary and non-discretionary spend items. The non-discretionary spend items, such as your utility bills, will not have any flexibility for change. On the other hand, with your discretionary spend items, things like travel and office supplies, you will have the ability to manage your spend activity. Ideally the goal in any budget is to minimize your discretionary spend items to the best of your ability.
Budgeting is unique to the small business just as it is to the individual. Once you find the appropriate mix and strategy you can set your sights on a clear and successful path.
For more information on budgeting and additional resources to help you with your small business, be sure to check out CPA Canada’s Just the Facts: Business Series.
Roshan Quraishi, CPA, CMA
Roshan Quraishi, CPA, CMA, has more than 10 years of finance experience, working in industries such as financial services, telecommunications, pharmaceuticals, healthcare, and the government sector. He is currently a senior financial analyst for the Trillium Gift of Life Network. His role entails providing support to clinical leaders in all areas of finance.