Annual Budgeting for Founders
Written by Amanda Bower | Published: July 7, 2022
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If there’s one thing that can impact the future trajectory of your small business or startup, it’s your annual budgeting process. Annual budgeting is critical for not only ensuring that your cash flows never run dry, but that’s not all it’s good for. Annual budgeting is also the time when you can carefully strategize for your financial future, analyze and understand where your finances are today, and identify revealing financial trends, so you can make the best choices possible for your company.
Annual budgeting for founders might be intimidating, especially if you’re at the helm of a new business. It’s also not necessarily the most straightforward or clear process, which can lead to confusion. But creating your annual budget doesn’t have to be intimidating, or something you think you’ll get wrong. That’s why we created this step-by-step guide, to walk you through this process of annual budgeting for your small business or startup, and to maximize the impact of a strategic financial plan.
What Are the Biggest Goals of the Budgeting Process?
As we just mentioned, the annual budgeting process can have an incredible impact on your business far beyond just determining cash on hand. Here are just a few of the biggest goals of the annual budgeting process, and what you can hope to achieve by executing your budget.
Staying strategic with your cash flow
Of course, as a founder or leader, one of your top goals is to ensure that cash never runs dry. In general, cash flow analysis for startups can help you understand where your cash is today, and how much your business is actually spending. It can also help you understand if you should be investing more money in the business, if you can afford unusual moves (like an aggressive market move), and if you might need additional funding in the not-so-distant future.
Annual budgeting can also help you understand how much emergency cash you should have on hand, in case things take a difficult turn. This can help you plan for worst-case-scenarios, and help ensure that if you do experience them, your business is more than prepared to weather those storms.
Understand your business trajectory
Putting together an annual budget doesn’t only involve crunching numbers. It includes careful thought and strategy between decision-makers, in order to understand what you want and expect from your business in the upcoming year. For example, if you want to grow your business by expanding into a new market, what does that entail? Do you need additional transportation, a new marketing strategy, or a new supplier in the area?
Considering questions like these are important for creating your annual budget. But also, this part of the budgeting process can help you put your next plan into motion. Annual budgeting allows you to turn ideas into concrete goals, and understand what financial steps you need to take to get there.
Making guided & intentional decisions
From staffing decisions (like how many new hires you can bring on board), to deciding how much to spend on individual marketing channels (such as email, social media, and paper mailers), annual budgeting helps you make strategic decisions that can have a positive impact on your growth.
Think about it this way: trying to make these critical big-picture decisions without a comprehensive understanding of your budget can lead to inaccurate estimations, which can lead to unwise financial decisions, and eventually, potential financial disaster. In fact, these decisions are best made when you have a deep understanding of your budget, because that’s when you can most effectively predict the financial impact of those decisions.
Course-correct when necessary
As most leaders and founders will understand, startups and small businesses can be quite difficult to master, and it’s almost impossible to get everything right on the first try. With that being said, it makes sense that many startups and small businesses experience difficulties, false starts, and failed efforts.
While these might be challenging experiences to navigate, they certainly don’t have to be an end-all-be-all. A great way to tell what’s working and what isn’t working is by understanding your budget, and where your funds are going. For example, if you’re pouring money into your print marketing, but you see that most of your leads are coming in from social media, you can adjust your budget accordingly.
What To Gather Before Starting
Before kicking off the annual budgeting process, there are some things you should gather before getting started. You should definitely gather all of your startup accounting documents, emails, and paperwork related to cost and revenue. Those papers and receipts that you stuffed into a filing cabinet will probably come in handy during this budgeting process. Even if you don’t immediately know every document and receipt you’ll need, having your main resources in one place can help ensure your process is as efficient as possible.
Next, you need to determine what tools you want to use for this process. For example, you might want to use a plain old notebook and pen (or at least would like the assistance of one), but it’s likely you’ll also want some digital tools. They can be as straightforward as an online spreadsheet, and as advanced as an online budgeting software.
Keep in mind, as you begin this process, you don’t have to perfectly predict your financial needs down to the penny in order to create an excellent and useful budget. Especially if it’s still the early stages of your company, it might be difficult to understand every aspect of your finances. But the best thing to keep in mind? It’s always better to underestimate revenue and overestimate expenses than visa versa, so you can be fiscally prepared for scenarios like this.
Creating an Annual Budget, Step-by-Step
Now that you have an understanding of the goals of an annual budget, and what you need to bring with you to kick off this process, it’s time to start actually creating your annual budget. Here are the steps you should follow.
1. Map out startup costs
These are the costs your business has before you actually launch your company, and are the things that are essential to launching your business. These costs include assets, which are usually one-time purchases of things such as properties, furniture, and vehicles. These costs also include expenses, which you incur prior to your business before it even launches, such as rent.
2. Calculate fixed expenses
Fixed expenses, or fixed costs, are also known as your “overhead.” This includes recurring expenses that need to be paid on a regular basis, regardless of how much money your business actually makes. This might include things like rent, insurance, and payroll.
3. Calculate variable expenses
These are the expenses that can change from month to month, and are likely related to business output. These could include things like transportation costs, marketing costs, material and tools, and labor.
4. Map monthly revenue
Your past revenue figures can help you predict future financial profits and needs. If you have past data, you can use it to estimate future revenue. For example, if you’ve been experiencing steady growth month after month, you might have a good idea of what the next few months should look like. If you don’t have enough revenue data to pull from, you can make two or three different estimates, using a figure that shows more ideal outcomes, and one that demonstrates more conservative outcomes.
Calculating monthly revenue means taking into consideration your customers or clients, and their spending habits as well as anticipated market trends.
5. Make adjustments
Now that you’ve calculated your costs and your revenue, you can calculate your financial needs, reviewing and adjusting your figures. This is when you can tweak figures as you see fit, where you can add in pad for unexpected expenses, and you can finalize your budget overall.
You can also sort your expenses into different categories, to help you have a deeper understanding of what your budget is telling you. For example, you can categorize things as “essential” or “nice to have,” so you know that if you’re in a tough spot, you have expenditures you can immediately get rid of.
Creating your first annual budget is the first step in a healthy relationship with your accounting. That being said, not everyone wants to make one. If you need some assistance, reach out to our team and we’ll get you started.
We get it. Creating your annual budget isn’t for everyone, and even we can admit, for most people it’s easier said than done. But that’s where we come in. We offer tons of game changer accounting services to meet all of your accounting needs, and that includes creating an annual budget.
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