Every year brings new opportunities as well as new challenges. Every business needs to have a comprehensive plan for a year. Well-established plans utilize opportunities to the fullest and minimize the damages of uncertainties. This is especially important for small and medium-sized businesses that do not have a lot of resources to insure themselves against contingencies. When it comes to having plans for your business budget is the queen (or king). With a budget, you determine how to allocate your resources and make the best of them. So, here is our guide to planning your 2022 business budget.
Why is a business budget important?
Let’s begin with the basis of it all – the importance of a budget. With a pre-determined budget, you have better control over your finances. You can track your revenues and expenses, and most importantly you have all the information in one space which gives you a bigger perspective for analyzing your company performance. And, when you plan the budget you can predict the accomplishments of your business for the year and make reliable decisions. Thanks to the budget you will be able to:
- Improve performance of your business
- Cut overhead costs
- Invest your resources in the development of profitable services/products
- Predict cash flow and plan operations accordingly
Basically, creating a budget is not a choice you have as a manager or an owner of a company it is a necessity for your success.
How to create a business budget?
Starting to work on a business budget can be challenging, especially if you do not have previous experience. A lot of small company owners struggle with this part of a business because lack of background in finance and the inability to hire professionals who would create a budget for them. But creating a well-thought-out budget is not as complicated as it sounds. You already have the materials for it you just need to sort them and interpret them accordingly. To simplify this process for you, we have created a simple guide that you can easily follow:
5 Step guide for planning budget in 2022:
1. Analyze your expenses
Start with a thorough analysis of your expenses from previous years. Ideally, you would want to have information from more than one year, but if you are just starting out, whatever you have will work just fine. Remember that process is about smartly using your resources.
After you get the data, determine what are your fixed costs and variable expenses.
Fixed Costs – These are costs that you must pay regularly and do not depend on your performance. It does not matter how your production or sales change; fixed costs stay the same. Fixed costs include:
- Administrative Costs
Variable Expenses – these expenses change according to your operations. For example, if you increase the production process of a certain product you will need more raw material and more staff whose salaries are directly linked to sales. Some of the variable expenses are:
- Raw materials
- Credit Card fees
Analyzing and differentiating these two types of costs will give you a clear idea of how your business would perform with respect to change in sales. When analyzing the previous data, we advise you to think about your overheads. Cut the fixed costs if possible and try to negotiate the price of raw materials with your suppliers. At this stage, your job is to understand where you spent too much last year and minimize the waste in 2022.
2. Estimate Revenue
Base your estimation on existing data. If you have numbers from the previous several years calculate the average growth of revenue. We assume that in 2020 your business struggled due to COVID-19 but hopefully you managed to improve things in 2021. When estimating revenues in 2022 do not be pessimistic but try to exercise prudence. Identify all your revenue sources and calculate your average monthly revenue. If sales have seasonality, make sure to highlight months when you expect to earn less so you can budget more.
Keep in mind the cash flow! Remember, revenue does not mean cash. And while you might generate revenue you might get cash a bit late. When estimating revenue remember to consider when your clients pay, is there a big-time gap between purchase and payment? If there is, then try to plan your payments accordingly.
3. Evaluate expected gross profit
Gross profit means the difference between your total revenue and costs directly connected to the production of goods. To have a better understanding of your financial situation and plan the budget accordingly calculate gross profit margin. Gross Profit Margin = Gross Profit/Total Revenue x 100. This will give you an idea of how well you are managing to generate sales with existing costs. Ideally, you want the gross profit margin to increase every single year. Even if revenue hence sales decreases for some reason, it is a good sign if gross profit margin increases. Because this means that you are improving your company’s ability to generate sales with fewer resources.
4. Set Goals
When creating a business budget for 2022, focus on the goals: what would you like to achieve in 2022? Aim to decrease fixed costs and cut unnecessary expenses. Determine realistic goals for increasing revenue and profit. And do not be scared to invest. In the budget consider upgrading equipment or purchasing new software. The goal of the business budget is not minimizing expenses, it is the smart allocation of existing resources.
5. Be ready for the best and the worst
To be ready for anything that might happen have a budget for the best case and the worst-case scenarios. We live in a world where sudden changes are not strange, and we need to adapt to them. The quickest way to adapt is to prepare. Have one budget which considers the most optimistic generation of revenue, also prepare a budget that takes into account increased expenses and decline of sales. Additionally, to break-even analysis. Find out how much revenue you need to generate to cover all your costs. While this can be time-consuming, it might be the best thing you could do when creating a business budget. If your business has to face sudden changes in 2022, you will already have an idea of how it could affect your finances and performance.