One of the topics that contractors often talk about – but don’t always do – is budgeting.
They know how to estimate and run jobs on budget, but often overlook budgeting for the rest of their companies’ operations. The following is an overview of areas any organization may consider as key to its budget.
Many owners of small to midsize businesses don’t prepare a budget or update the one they have, typically because they’re too busy or simply aren’t focused on sticking to a budget. Yet, with the economic recovery slow and every dollar precious, business leaders need to know where money is going – both now and in the near future.
What’s more, external stakeholders may look for your company to maintain a sound budget. Many banks, for instance, are setting up loan covenants with an increased emphasis on budgeting. With that in mind, here are six key components of a complete business budget:
1. A description of your business and its market.
You may think you have a sound budget for your company, but it won’t be accurate if it’s for your company three years ago. Compose a brief description of precisely what you’re doing right now, how your market is performing, and the economic factors that may be affecting how your money is budgeted.
2. Explanation of how the budget supports the company’s business plan, mission, vision, values, goals and objectives.
To be included in the budget, items should tie into and support overall company goals. If you can’t effectively demonstrate how an item enables achievement of a particular goal, you should question its merit.
If you don’t already have a mission statement, compose one to help you with this component.
3. Line-item details for allocating funds.
The budget format should follow the formatting of company financial statements. Typical examples include staffing, real estate, equipment and material needs.
Although it can be tedious to maintain a detailed budget for all company expenditures, it’s good cash flow management. Cash flow management, while related to the budget, is generally a separate topic. Your budget can facilitate expense tracking and help guide spending decisions to align with your business goals.
It’s also important that the basis of your line-item detail budget not be the prior year actual – but rather the expenditures should be calculated, based on current known conditions and assumptions.
And, most importantly, assign accountability: The final budget is signed and dated by those approving it.
4. Expectations for measuring performance against the budget.
For analysis purposes, a budget is useful only if you update it regularly so it accurately reflects both actual and anticipated spending. For instance, you may have under-budgeted or over-budgeted on some items and, thus, spent more or less than you expected.
For analysis, keep the original and records of all process-approved changes.
5. Supporting appendices.
The appendices may include a historical budget and results analysis. Also consider attaching summary documents for each department, tables and graphs depicting market and cost trends, a list of key assumptions used and appropriate organizational charts.
6. A dashboard or executive summary.
A summary or dashboard can be a good way to focus all of the information in your budget and provide you with some practical “takeaway.” More important, a dashboard can make your budget more digestible to lenders and outside investors.