Budgeting is a key part of financial management for any business be it big or small. Unless a business can manage its revenue and expenditure in an efficient manner, it will not be able to achieve cost reduction and economies of scale in order to grow. Budgeting is thus a very important financial management activity. Small businesses do not have as complex financial structures as a big business, therefore budgeting for small businesses is relatively easier and can be even done without the help of a financial manager. With little research and financial knowledge, small business owners can utilise some key budgeting techniques to fine tune their revenue and expenditures to control costs and maximise profits.

Budgeting Techniques

If a small business owner is making a budget for the first time, then there are a few techniques that should be followed in order to help with the budgeting process.

Employee Inclusion

It is very easy for a business owner to make a budget for the business, based on their own assumptions. Many business owners create budgets this way, but this results in a budget that may not take into account all the relevant factors. It is therefore better to include employees from every level of hierarchy, these employees can give their suggestions and input which can be considered by an executive level budgeting committee or a control group.

The benefit of including employees in this manner is that firstly since the employees down the hierarchy are directly involved in operational work, they have a better idea of the variables that need to be considered. Thus, the business owner or the budgetary control group will have more wholesome data to use for budgeting. Secondly, the act of including the employees in the consultative process for the budget will make them feel included as a part of the business and this will in turn increase motivation levels.

Budgetary Slack

Budgetary slack is an important budgeting concept. Businesses at times intentionally understate the revenue and overstate the expenditures in order to create a financial cushion in the budget in case things do not go as planned. For instance, if the revenue is expected to increase by 15%, budgetary slack may reduce it to 12% for a more realistic view.

The extent of budgetary slack should be carefully determined because unnecessary budgetary slack may end up reducing the efficiency levels. Budgetary slack is preferable in uncertain conditions particularly those faced by startups and small businesses.

Know your business cycles

Most businesses do not generate revenue evenly throughout the year, instead the revenue streams follow set patterns that coincide with other factors such as seasons, festivals and other events. Business owners should therefore identify these patterns before making a budget, as doing so will allow them to create specific and tailored budgets.

Revise

Budgeting is a continuous process that does not end simply with the creation of a budget. Budgets need to be monitored and adjusted continuously while keeping in view the budgeted and actual activity and performance levels. Business owners should therefore constantly review and revise the budgets.

By following these budgeting techniques, small business owners can make more relevant and appropriate budgets that can help them cut costs and manage revenue and expenditure in an effective manner