How to best manage your business’ budget to avoid overspending

For many business leaders, budget planning remains one of the more burdensome responsibilities out there.

You know the drill: you pore over every last detail of your company’s budget. Then guesstimate - more or less - what your expenses and revenue might be over the next accounting cycle. You gather input from your CFO. You do your best to cover all your bases.

But then a year later you realize that, yet again, you’ve gone over budget. Perhaps some teams didn’t follow the spending parameters you set for their project. Maybe unexpected costs came into the mix.

In truth, setting out a budget for one’s company isn’t as straightforward as it seems.

Whether it’s apprehension towards crunching numbers, projections or forecasts - or recognizing that no business is spared from risk or challenges (or even a pandemic).

There are, however, some easy and effective best practices that can help you avoid overspending and hit your budget forecasts.

This article explains it all.

As the leader of your business, you are the captain of the ship. You plan the voyage, and you make sure the ship is properly stocked for its journey.

But overlooking your provisional budget equates to sailing by sight, with neither map nor compass. In the fog.

By not defining your budget, you expose yourself to poor decision-making, runaway spending and overestimating your revenue. Your company’s survival could be at risk.

This is where a comprehensive financial forecast can be useful.

• Gain visibility over your cashflow

Understanding exactly what’s coming in and what’s going out allows you to make informed decisions for your business. So you can clear the fog and better chart the course.

• Allocate funds wisely

Getting clear and organized about your budget allows you accurately assign funds to any given project at your company. You’re better able to calculate a ROI (Return On Investment). Projects can move along more quickly. Your teams feel more motivated and more valued in their work.

• Fewer treasury hiccups

By setting out a provisional budget, you lower your odds of finding unpleasant surprises on your bank statements. You effectively cut down on extraneous expenses and treasury troubles. Basically, you get a better handle on your money.

So now that you know you need to factor in both revenue and expenses for your budgeting, what’s next?

The tricky part now is estimating each one properly... and herein lies the crux of the challenge that is budgeting.

Anticipating revenue and expenses isn’t easy. In fact, it’s nearly impossible to get the numbers exactly right, down to the last euro.

What you’re really aiming for is getting the most realistic projections possible while factoring in the possibility of unexpected bumps in the road.

There are different ways to go about it.

The most popular method is based on historical data. In practice, this means working from data you already have, e.g. last year’s numbers. These figures will help direct your sales and cost estimates.

For example, you can base yourself off of last year’s fixed costs for next year’s budget estimate.

Good to know: fixed costs are expenses that remain more or less stable regardless of changes in sales revenue (e.g. rent, bills, etc.).

Having a good grasp of the nature of your industry will also help you better adapt to circumstances that are likely to affect your budget (for example if there are seasonal slowdowns or upticks in business over the course of the year).

And last but not least, include a ‘rainy day fund’ in your budget. No business is spared from the unexpected. By setting aside money so your business can proactively respond to an incident or a sudden change, you limit your exposure to cash flow issues down the line.

It all depends on how your business is structured.

If you’re at the head of a micro-enterprise (in France a TPE, or Très Petite Entreprise with <10 employees) generally it’s you - as the leader - who will spearhead the project.

If you run an SME ( a small business with <250 employees), you ought to consult your CFO when fleshing out the provisional budget. The point here is to call on the expertise of a management controller, as their primary role is planning and managing the company’s budget.

Whatever the size of your business, it’s important that you involve your teams - or at the bare minimum, your C-suite managers - when setting a budget.

This allows you to check in about planned projects for the coming year and assess the needs of each department. Leveraging their knowledge of their particular sector in the business will help fine-tune both your projections and your sales objectives.

Here’s one way you can set up the process for creating a corporate budget within an SME:

Step 1: Each team leader prepares and submits a project budget for their department to the CFO.

Step 2: The CFO examines all of the projects and assesses their viability, then scopes out an overall budget.

Step 3: You adjust and validate the final budget.

Best practice #1: Share the budget with your teams to avoid overspending

What happens if you’ve built a solid budget, only to find that your company still manages to go well above the set allowance?

Overspending is less an indication of bad faith on behalf of your employees and more an indication of lack of communication .

Which is why, once you set out your budget with your administrative unit, it’s important to communicate this to all your teams. It can be as simple as circulating a simple document that outlines the allotted spending for each project.

That way, everyone has access to the same information and can spend with full awareness and consideration of the budget.

Best practice #2: Automate managing allotted budgets

Many a business owner has wasted precious time going over company expenses with a fine-tooth comb, keeping a close eye on statements in order to catch potential budgetary slip-ups.

Not only is playing the investigator time-consuming, it can be anxiety-provoking. Trying to manually reconcile several hundred bank transactions isn’t exactly the easy life.

Thankfully we live in a time where there are multiple tools on the market that can automate expense tracking in order to avoid overspending.

Take Qonto, for example. We give you the option of creating and allocating team budgets.

💡Let’s put this into a real-life scenario. Imagine you’re the head of an SME and have set aside €15,000 for your Marketing department and €10,000 for your Sales department. 

With the Budgets feature you can then create a budget for each department in just a few clicks, giving you real-time visibility over transactions, wherever you are, and letting you (truly) avoid overspending.

Best practice #3: Examine and revisit your budget often

Sometimes things don’t work out as expected, as 2020 clearly showed us.

Without going so far as to worry about a future pandemic, the market you operate in is bound to fluctuate (due to the variability of available raw materials, or global logistical issues, etc.).

Plan accordingly. Avoid overspending by revisiting the relevance of your budget regularly - every trimester, for example - in light of cyclical or structural changes.

What you’re doing here is periodically evaluating whether your estimates really hold up to your real revenue and spending, and course-correcting if it’s not the case.

This is a common practice for many business, but even more so since the recent health crisis. In finance-speak we call this a rolling forecast.

Rolling forecasts allow you to promptly react to unexpected issues (by pushing certain projects further out, for example) to avoid cash flow issues later in the year.

The Base Budget Zero method stands on the other side of the budgeting spectrum from historical forecasting.

The BBZ ignores the previous year’s data when calculating the coming year’s budget.

The idea is to start back at zero for:

• Redefining the company’s work;
• Prioritizing work according to how it supports profits and the overall growth of the company.

This approach puts you in a position to question each and every expense item to optimize costs and deftly move resources to priority projects.

The BBZ method doesn’t take the previous years’ figures as gospel, which makes it a fitting strategy in times of crisis.