In business, operating without a budget is risky and difficult.
Without a budget, you’ll never feel entirely confident in your basic decisions and, in the worst-case scenarios, run out of cash at crucial times.
Budgets will naturally change as your organization’s needs do, but one of the best places to figure out your future financial needs is to take a close look at your current spending.
We’re here to walk you through exactly how you can evaluate your current budget and use that information to build your budget for next year.
Run a Budget Variance Report and Make Adjustments
A crucial concept to understand is budget variance. It’s essentially a comparative analysis of your actual spending and the amount projected in your budget.
You can dive a little deeper into this report by carefully looking at your actual expenditures over the past year and seeing whether there’s any pattern in how they relate to your projected spending.
This will answer a few critical questions:
- Is one part of your budget consistently more than you expected?
- Are you setting aside too much for others?
- What areas can you cut back on spending to be more reflective of your budget?
Use this information to plan for 2023 and aim to close your budget variance gap in the year to come.
Ideally, your budget variance will be as close to zero as possible, though there will inevitably be unexpected expenditures. The key is to find and address patterns that are happening now, so they don’t hold you back in the future.
Plan for Changes in Your Business
No one knows your business better than you. Chances are you have a pulse on if the new year will bring:
- An expansion
- A change in manufacturers
- The need for new equipment
- Change in product or business profile
- Staffing increases or decreases
- A new marketing campaign
- The need for outsourced workers
- Increased sales channels
- Etc.
Each of these business changes will play a major role in your spending, so it’s important to take them into consideration as you build your budget for the year ahead.
Align Your Budget with Your Goals
While many may be tempted to simply roll over their 2022 budget to 2023, smart business owners and leaders will take some time to consider their goals.
After all, the economy in 2023 will be different than in 2022. Staying within your budget is important, but not if it’s keeping your organization from reaching where it hopes to be.
The best place to start is by evaluating your current goals. Are you where you hoped to be? If not, determine where you missed the mark and build a new strategy for reaching your goals into your plans for 2023.
If you reached your 2022 goals, now is a great time to start setting goals for 2023 and your budget can help you do that.
For example, your company may want to lower your debt burden over the long term. Upon reviewing your budget, you may notice you have extra cash left over every month that had been set aside for marketing. For next year’s budget, consider shifting some or all of this difference toward retiring debt.
This is also a good time to evaluate your other business prospects for the year ahead. If you hope to increase revenue and decrease expenses (like most businesses) your budget is the best place to start.
Consult Your Team
Running a business is next to impossible to do all on your own.
Most successful businesses are built around a strong team that works well together. This is why your team should play an instrumental role in evaluating and creating your budget.
Team members have different perspectives on spending and can consider more specific aspects based on their departments that you may miss. They can also:
- Anticipate changes within their department
- See the business from a less-personal perspective
- Suggest department-specific ways to cut costs
- Offer more efficient ways to spend money within their departments
Bringing your team into the budgeting process also has one other underrated benefit. When they help create the budget, they’ll tend to take more ownership of the results. You may find a whole new level of dedication from your employees simply by including them in the budgeting process.
Turn to an Experienced Financial Partner
As 2022 comes to a close, making sure your business is ready for the new year should be a top priority.
Evaluating your current budget is the best place to start. It will give you valuable insight into your numbers and can tell you exactly where you need to make improvements in the year ahead. Once you’ve done this, you can begin building out a budget that will set you up for success in 2023.
If you’re searching for budget-building guidance, consider PlotPath! We offer services that help business owners like you, plot their path to growth. Contact PlotPath today to learn more about how we can help your business grow!