Some businesses like to tackle their budget by looking at last year’s numbers and increasing or decreasing that by a certain percentage (a top-down approach). Others like to start from zero and add on what they’ll need next year (bottom-up). But remember this: Don’t try to do both. You’ll only create chaos and confusion.
The last few years have shown us that the economy can turn on a dime. Don’t get caught off guard. Put together a budget for what you expect, another for the best-case scenario and a third for the worst.
Accrual accounting is great for keeping the books clean, but when times are tight you need to budget for cash flow. Forecasting your cash inflows and outflows will help you see when you’ll need financing to bridge the gap. And be realistic about how quickly you can collect your receivables. Your customers are likely facing a cash crunch, too.
Budgeting might feel like an introspective exercise, but how well have you planned ahead if you’re not sure your vendors can meet your demands? Be in constant communication with them and have backups in place for rainy day scenarios.
As the saying goes: garbage in, garbage out. Your budget is only as good as the data you entered into it. If your accounting is poor and you’re constantly inventing numbers, the exercise becomes pointless. Invest time and money in keeping good records.
Once you create a budget, don’t stick it in a drawer. Track your performance against it on a monthly or quarterly basis, and update it as necessary. If you fall off the path, give yourself a road map to get back on.