Resource allocation, risk management, and cost control are all essential business operations that rely on a company having an effective budget for their business.
“Trying to run a business without an adequate budget is like trying to hike without a map, trailheads, or a compass,” says Swapnil Shinde, Co-founder and Chief Executive Officer at Zeni. “You may get to your destination by sheer luck, but planning ahead will help ensure you don’t get lost in the woods.”
Zeni is an AI bookkeeping platform designed to meet the ongoing financial management needs of business founders. It is Shinde’s third startup, which he launched after successful exits with his first two, Dhingana and Mezi. By leveraging the power of artificial intelligence and a dedicated team of financial experts, Zeni supercharges startup finances for speed and reliability.
Embracing the power of budgeting
Business budgeting can be overwhelming, especially for founders lacking support staff. It’s time-consuming and requires an understanding of complex and often confusing financial concepts. Founders also often operate with an optimism bias, which can lead them to believe that the structure and support a budget provides are unnecessary.
Avoiding a budget, however, makes it much more challenging to build a successful and sustainable business.
“Budgeting ensures your company’s resources are allocated appropriately and according to plan, so you efficiently invest resources where they’re intended,” Shinde explains. “A budget gives you greater control over expenses by providing excellent expense tracking and recordkeeping, alerting you to the need for adjustments. It also provides the data needed to paint an accurate portrait of your business’s likely financial future, allowing you to plan and spend accordingly.”
Gathering key financial documents
Budgeting starts with gathering key financial documents, including income statements, cash flow statements, historical ledgers, and balance sheets.
“The more reliable data you have, the better suited your budget will be to address and anticipate your business needs,” Shine says. “On the other hand, failure to find the right documents could lead to over-projected income, under-projected expenses, or under-utilized capital, all of which can be costly to a company.”
When gathering financial data, companies should focus on numbers that are new enough to be relevant while reaching back far enough to provide a reliable historical overview. Income statements that are a decade old likely won’t be helpful. Looking at data from the past three to five years is typically a sound strategy. However, companies should also consider how major events — such as a global pandemic — may have introduced anomalies into their historical data.
Outlining business goals
An effective budget will support your business goals. Consequently, your business goals must be established with some detail before you can build a budget to support them.
“Before you decide how to allocate resources or where to cut spending, write out what you want the business to achieve in the future,” Shinde offers. “Set focused, time-sensitive, well-structured goals in different areas of operation.”
Determining key budget factors
Your budget will be based on several critical financial factors, starting with your estimated revenue. This should include projected revenue from all sales and other income sources.
“Estimating your revenue involves looking at both the past and the future,” Shinde explains. “Businesses should take an in-depth look at their historical data and make an up-to-date assessment of consumer behavior to project future sales. This type of prescriptive analysis approach allows you to leverage the insights of both historical analysis and consumer trends to predict future financial activity.”
Incorporating fixed costs and variable expenses is another part of the budgeting process. Fixed costs don’t fluctuate with operational output or activity, meaning they must be added as a routine line in the budget. Variable expenses, such as the cost of raw materials, fluctuate, making them more difficult to account for. To make the budget work, variable costs must be estimated and adjusted when fluctuations demand.
One-time expenses also need to be forecasted and included in the budget.
“Let your high-level strategic planning inform your budget decisions on one-time expenses,” Shinde advises. “If, for example, you need to recruit engineers to support the R&D efforts for the next phase of a project, make sure your budget provides for that one-time expense.”
Completing the budget requires consolidating the contributions from all of the company’s various departments and reviewing the data for overlaps, discrepancies, and redundancies. Once a budget is launched — especially if it is the company’s first time utilizing one — it should be monitored closely and adjusted as financial needs evolve.
Leveraging technologies
Today’s companies have a wide variety of tech tools that can help with the budgeting process.
“The emerging field of machine learning offers particular promise for budgeting,” Shinde shares. “AI-driven accounting platforms automate much of the manual data entry companies must do, which provides data more quickly. For business budget planning, AI accounting can chart expenses, track revenue streams, and consolidate accounts — all essential activities for budget building.”
AI-driven bookkeeping also improves the accuracy of financial recordkeeping, giving companies reliable data to lean on for their budgeting.
“Running a successful business long-term is challenging,” Shinde says. “Without proper business budgeting, it becomes nearly impossible. Building an organizational budget gives you a 30,000-foot financial view that helps you to avoid getting lost in the weeds.”
