7 budget tips to unlock your business

Keeping a record of your financials is very important for your business. One aspect of your financial management is budgeting which is the process by which you estimate your revenues and expenditure.

Budgeting helps you plan for the future of the company. There are several types of budgets mainly annual budgets for operating expenses and multiyear capital budgets.

1. Categorise expenditure

Categorising your expenditure helps you determine the major cost drivers for your expenses.

These categories between variable cost and fixed cost are necessary for proper accounting of your business expenses.

One way of categorising expenses is by identifying the staff cost, direct cost, and overhead cost for your business.

The staff cost will include salaries and benefit paid to your employee and direct cost will include things like travel cost, expenses related to the hiring of consultants, meeting cost etc.

The direct cost represents the variable cost of running the business. While overhead cost includes things like rental of premises, utilities, communication expenses and equipment rentals etc. By categorising your expenses this way, you can determine the expenses for various categories, and this helps in developing future forecasted growth for your business.

2. Link spending to performance

One important thing in budgeting is linking expenditures to business performance through strategic alignment.

For your business to succeed you need to develop five years strategic plans, which is a plan of where you want your business to be in the next five years which should also be aligned with your mission and vision of the organisation.

This will entail identifying the priorities, objectives, and goals. Then link them to the expenditures, through the identification of business impact and outcomes which are normally referred to as deliverables.

Thus, in today's business environment, you need to start budgeting by deliverables rather that the input and output budget line items.

3. Core expenses vs special ones

Separating core business expenses and special initiatives helps to determine the baseline resources needed on a yearly basis.

Which becomes the starting reference budget around which you build your work programme around. Special initiatives are not part of the core work programme but are needed to deliver policy and strategic objectives that enhance your business performance.

These could be initiatives that have a wider spillover effect for your business and are costed separately using a cost-benefit model to determine their effectiveness if applied to the business. Some of the institutional reforms could be costed as special initiatives if their overall objective is to enhance institutional performance.

4. Top-down

The best approach to developing a budget is through both top-down and bottom-up approaches. Top-down involves input from senior management through a strategic priority list for the year which provided the total resources envelop for the whole organisation in that budget year. While the bottom-up approach involves consolidating resource requirements from each business unit.

Every year the organisation should develop a budget circular with key dates for the submission of budget estimates for the business units. These submissions are reviewed by the budget unit for quality and comprehensiveness and a consolidated global budget is developed for the whole organization.

5. Arbitration process

To ensure proper allocation of resources to the business priorities, arbitration processes should be set up where the business units present their resources need to senior management of the organisation through an arbitration process, which is a fair way of listening to each business unit's need for extra resources and discussing which priorities to fund transparently.

Following an arbitration process, there should be a formal process for approval of the budget envelope for that year. Once approved, the budget holders are given the authority to spend up to the approved amount.

Any request for an additional budget beyond what was approved is then prepared as a supplementary budget to be considered for approval by the designated approving authority for your organisation.

6. Budget flexibility

During the budget implementation year, there should be enough budget flexibility to a category for emerging priorities or business pivoting in cases of emergencies as we had during the Covid-19 period.

Budget holders should be able to redeploy funds to meet emerging priorities while at the same time maintaining the required budget discipline. There should be clear rules that govern budget flexibility and could be defined in business policy and procedure documents such as the delegation of authority manual.

7. Track and report

Tracking and reporting on budget and expenditures during the year becomes very key to ensuring compliance with the approved spending authority. This is very important in determining the forecast for the next year's budget.

The historical pattern of expenditures becomes very useful in determining the budget trajectory for the coming years. It is also key in determining the cost structure of your organisation.

It is based on these historical expenditures that a budget anchor can be determined that will guide the future growth in budgets.

Budgeting is thus not only a management tool but an important determinant of your future growth and the trajectory of your business. By applying these budgeting principles, you guarantee growth for your business and a means to contain costs and grow exponentially.

The author is a senior budget officer at the African Development Bank and the author of Unlock Your Body Budget.