Use these simple strategies to build a budget that helps you spend wisely and secures your financial future.
Financial preparedness is critical for new businesses that may not have a cash reserve to draw upon. A recent Capterra survey* reveals this vulnerability: 16% of small businesses lack a buffer to weather unforeseen expenses (for example, sudden equipment breakdown), while 11% possess insufficient savings to endure a six-month lull in sales.
Good planning and budgeting practices can discipline you in everyday expenses and help you allocate resources more efficiently.
If you’re a small business owner or new entrepreneur looking to make the most of your money each month, Jackson Yin[1], Managing Director of iBuild Building Solutions, has some advice on creating and steering an effective budget.
"A healthy cash flow is oxygen for a small business. If you run out of cash, you sink. Budgeting software can be a lifesaver in this regard."
Jackson Yin
Managing Director, iBuild Building Solutions
Like many new entrepreneurs, Jackson started budgeting with a spreadsheet. But that caused him serious delays in determining if his business was profitable or running at a loss, sometimes leaving him in the dark for as long as three to six months. Fast forward to today, Jackson is winning government projects, and he credits a large part of his success to adopting budgeting software for better financial management.
In this article, we discuss three practical budgeting tips shared by Jackson, drawing on his experience with budgeting software to help you make smart financial decisions.
1. Create project-level budgets, in addition to your overall budget, to increase productivity
Instead of relying solely on an overall budget, Jackson emphasizes creating project-level budgets. “From my experience, I have learned that tracking project-level profit and loss is very important and helps you create a realistic budget,” says Jackson. Having separate, detailed plans for each project keeps team members accountable and ensures the budget stays on track.
"Creating project-level budgets was very rewarding for our project managers, who were incentivized through profit sharing. This aligned project-level goals with overall business objectives and motivated teams to save costs and generate more revenue, knowing that a percentage of the project’s profit would be shared among them."
Jackson maintains two types of budgets for his company:
1. The annual budget for an aggregate view of the company’s financial performance, which:
mainly relies on annual revenue forecasts.
addresses questions regarding expected top-line revenue and the number of projects to be completed.
uses revenue projections to determine overhead costs such as rent, electricity, and new contractual employees needed.
2. Project-level budgets to ensure the profitability of each project. They:
provide in-depth cost estimates for every project.
take into account the suppliers involved and the revenue expected from each project.
/ Feature overview
Customizable templates in budgeting software enable departmental managers to create budgets tailored to their specific needs. A company can develop a comprehensive budget, connecting it to precise cost estimates for individual departments or projects as they create their own respective budgets. It allows users to create multiple expense categories, adjust budget amounts based on historical trends, and set profit margins for different projects. Additionally, these budgets can be centrally monitored with multi-department or project-level views offered by software, to swiftly detect discrepancies and make adjustments as needed.
Two departments at iBuild, finance and project management, collaborate effectively to manage both high-level and project-specific financial control. “We do project-level budgeting every time we win a new project,” says Jackson.
Want to create custom budgets for your operations? Consider these things:
Define your overall financial goals for the year. Think about your sales targets, cost-reduction goals, and other investment plans.
Identify your primary sources of revenue to recognize projects or departments that need separate budgets. Consider elements such as material costs, labor, marketing, and additional overheads that contribute to their spending activities.
Ensure regular monitoring of your project-level budgets, so you can accurately asses their financial performance throughout the project lifecycle. Make adjustments as needed by reallocating resources or revising expense projections.
2. Track where your money goes and set alerts for overspending
Tracking expenses is essential not only to see how well a project is performing but also to set up safety nets in case things don’t go as planned; say, a project starts losing money. Jackson ensures close monitoring of expenses by setting up a "job budget” for each project and pre-determined estimates for every expense category, which when exceeded prompt alerts to the team.
/ Feature overview
Most budgeting software allows real-time expense tracking and management. With expense management, budget managers can create categories for different transactions and see where the money is being spent. They can also set alert approval limits for specific spending thresholds and create a workflow based on the type and amount of expenses.
Note: Some budgeting tools do not have their own expense management feature, which is why there’s a category of standalone expense management tools.
Tracking expenses tells Jackson and his project managers when to hold off on making purchases. For example, say a project is valued at $100,000 with a 20% profit margin estimate, and you’ve received $80,000 from the client. Now, if your team informs you that you've spent $50,000 on this project and have an outstanding $25,000 purchase order, raising the project cost to $75,000, you might want to postpone that purchase until additional payment is collected from the client.
“Tracking expenses is very powerful in maintaining a healthy financial situation. It empowers teams to understand revenue situations and pause spending when necessary.”
Another way Jackson uses expense tracking is by setting limits on cost activities. “We use pre-populated parameters, such as $100 per square meter for window installation, which help us calculate the budget for each job accurately. If a supplier quotes a price that is 20% higher than our budget, our budgeting software alerts us to the area leading to overspending.”
Want to control your business-related expenses? Consider these things:
Choose a budgeting software with built-in expense tracking or integrate your existing software with an independent expense management tool.
Create expense categories specific to your business and set spending limits on each of those cost categories to make it easier to analyze spending patterns.
Enforce pre-set approval limits (say, a $5,000 cap for project managers or stopping spending when costs breach profit margin goals) to ensure all expenses above a certain amount are reviewed and approved before being paid.
3. Set up budgets for different cost scenarios to accommodate unforeseen client needs
Budgeting can be challenging, especially when unexpected changes arise. Jackson avoids such pitfalls by incorporating budget revisions based on different what-if scenarios into his planning process. Starting with the original budget, he uses these cost scenarios to speculate the fluctuations in cost and revenue if a project’s scope expands or contracts.
/ Feature overview
“What-if scenarios,” offered by most budgeting software, enable managers to understand the impact of a potential business decision, such as hiring an extra employee or procuring new factory equipment. It provides a real-time view of the impact of an event on a budget. It’s a powerful tool for budget planning, enabling business leaders to make well-informed decisions and prepare for the financial implications of their choices.
For instance, your client demands energy-efficient upgrades such as the installation of solar panels in their home. This will affect both revenue and costs of your home-building project. Budget variations will allow you to estimate these changes in no time. “In this case, our software would update the budget to reflect an increase in revenue of $5,000 and a corresponding expense of $3,000,” explains Jackson.
“Scenario planning gives flexibility to our budgeting process. Instead of losing money, we can systematically approach clients for additional funds to cover new expenses while ensuring we stay within our budget limits.”
Want to be ready for any unforeseen changes in business? Consider these things:
List down potential scenarios that may occur in your business, such as changes in pricing, upgrade demands from clients, or investing in new equipment.
Set parameters and variables that will be affected by each scenario. For example, if you're hiring a new employee, consider the cost of salary, benefits, and training.
Run simulations on potential changes using what-if scenarios to understand the impact of a change on your budget.
Check out this quick video on how to create a solid budget plan for your business in three steps.
Don’t settle for less than what is needed to take your financial management to the next level
Jackson’s final advice for business owners when it comes to shopping for budgeting software? Try, try, and try again before you buy.
Before committing to their current software selection, Jackson explored a dozen options before he found a combination of two solutions that best suited iBuild’s needs.
“Make the most of free trials or demos offered by software companies. It’s risk-free, so involve your team and see if the software has everything you need and will work well with your other systems for smooth budgeting.”
For budgeting beginners, Jackson advises, “Don't be afraid of making mistakes; it’s all a part of the learning process.” Start with a simple budgeting solution that can help you understand what you need from your budgeting tools.
The goal is to improve your budgeting practices, so keep experimenting until you find software that perfectly aligns with your small business needs.
Want to learn more about using budgeting solutions? Read our budgeting software buyers guide to understand the diverse functionalities they offer.