Budgeting for business: How modern companies control spending

What is a business budget? The CFO's master plan

A budget for a business is a financial plan, and it's more than just a set of numbers. Think of it as the CFO's master plan—a meticulously drafted blueprint outlining the financial boundaries the company aims to navigate the fiscal year. This plan sets the stage for how much can be spent on new ventures, technology upgrades, and other operational expenses, all while keeping an eye on the anticipated profits.

Once budgets are in place, heads of departments will do their jobs: to spend the money.

However, not all costs to the organization will come from the teams’ budgets. There are many other costs to consider, such as payroll, office rental, liabilities, and discretionary spending. Only the CFO and finance team can get a well-rounded view of how money flows in and out of the company, which puts them at the centre of business budgeting.

When do businesses draft up their budgets?

Businesses may budget annually, although revisions and adjustments might happen as the business makes unexpected wins or if the macro-economic landscape shifts.

Typically this will happen around the time of year-end close when businesses have the best available information on how the year has performed.

Year-end close happens at different months by country and company. For example, most companies in the UK close their financial years in April, but the US tends to finish in October.

The critical role of budgeting in corporate expense management

In the entrepreneurial journey, especially for small businesses, the initial stages often see a more laissez-faire approach to budgeting. This might stem from the absence of a dedicated financial team or an all-consuming focus on product development and market research.

However, as business transitions from startup to scale-up phase, the significance of rigorous budgeting and financial control cannot be overstated - it becomes the linchpin of sustainability and growth.

Smaller companies sometimes resist department budgeting initially, as founders and directors wish to retain full control of spending and decision-making. Said small companies tend to remain small, as founders fail to see the value in investments proposed by other team specialists.

Growing companies know that financial success starts with budgeting.

Why budgeting is non-negotiable for a growing businesses

1. Foundation for financial success: Budgeting lays down a businesses' financial framework. It involves allocating resources wisely and ensuring every dollar spent invests in the company’s future.
2. Surviving and thriving: While a relaxed budgeting discipline might work for a startup, scaling businesses quickly realize that robust financial planning is the key to thriving, not just surviving. The transition from survival to success hinges on the ability to forecast, plan, and control finances.
3. Empowering investments: As companies grow, making informed investment decisions becomes crucial. Founders and leaders must recognize the value of proposals from their teams, understanding that strategic investments drive growth.
4. Financial forecasting: Budgets offer a reliable financial plan so you can pinpoint available capital, forecast revenues and estimate expenditures moving forward.

Step by step guide to business budgeting (+ tips for CFOs)

Companies need different budgeting approaches depending on size, team dynamics, sector, or wider context. To keep it simple, we’re focusing on the basics that most companies will need to take care of budgeting, along with some budgeting tips for finance controllers:

Benchmark budgets against industry averages

Begin your budgeting journey by examining industry averages. These benchmarks, often presented as a percentage of revenue, provide valuable insights into typical spending patterns within your sector. It’s a universal truth that teams want to spend as much as they can, so use data to remain in control and make the budget count for everyone.

CFO tip #1: Use data for informed decisions: Leverage these benchmarks to negotiate budget allocations with department heads, ensuring expenditures are justified and aligned with company goals. Our analytics can aid in comparing your spending with industry standards, offering a data-driven foundation for budget discussions.

2. Define your financial targets

A budget is fairly meaningless without a purpose. The budget’s real purpose is to provide the means for the company to achieve its objectives. Does the company want to perform exactly like last year? If so, having the exact same budget as last year could work. Whether aiming for growth, market expansion, or sustainability, your budget is the vehicle that will drive these objectives. Some early startup companies may be tempted to put a finger in the air and come back with “we want to grow profits by 20%”. However, if this is in the face of a contracting market, new competition, and increasing supplies costs, the plan won’t succeed. Instead, there should be a thorough analysis of market trends, competitive landscape, and consumer behavior. In addition to this, the company should analyze previous performance against the market in previous years if available. Armed with this data, the finance team can set the context for achieving more realistic and achievable objectives.

CFO tip #2: Align budget with business ambitions: Consider the company's aspirations and market conditions to set achievable goals. At Payhawk, our reporting tools provide a comprehensive view of past performances and spending trends, assisting in the formulation of realistic financial targets.

3. Determine costs of running the business

A thorough analysis of current operating expenses lays the groundwork for understanding the financial baseline of your business. Conduct an analysis of costs and liabilities to understand what it takes to run the business the way it is today.

CFO tip #3: Conduct a top-down cost assessment: Identify all fixed and variable costs to ensure the budget accommodates essential expenditures. Our expense management system offers a clear overview of recurring costs, simplifying this critical evaluation.

4. Collaborate with department heads

At this point in time, you know what the company costs to run and what the targets are for next year. With this clear understanding of financial goals and operational costs, engage with department leaders to gather input on their budgetary needs and plans.

It’s time to talk to the Marketing Director, the HR director, the Ops Director, and anyone with a budget to let them know the targets (of course, some of these people might have been involved in setting financial targets to start with). More importantly, it’s time to hear what they have in mind. Is the Marketing Director planning to increase marketing budgets to account for increased competition or customer demand? If their analysis is sound, this marketing plan could be the way to achieve the bottom line set out on the targets.

Having heard from everyone, and together with the company leaders, it’s time to cut the cake and share it.

CFO tip #4: Foster collaborative planning: This dialogue is pivotal for aligning departmental budgets with overarching company objectives. We facilitate this process by providing a platform for transparent spend control and allows you to set custom spend limits for departmental budgets.

5. Incorporate a contingency plan

Of course, working with predictions means error. You’re essentially casting your eye into the future and forecasting revenue. Acknowledging the inherent uncertainties in business forecasting, it's wise to allocate a portion of the budget for unforeseen expenses.

But revenue depends on many factors beyond your control. Shifts in consumer demand, competitive investment, and macro factors such as the legal landscape can be just some of how your revenue forecast could fall through. Equally, costs to the business could go up. Inflation, increased rents, or a sudden need to lean on contracted employees can increase your costs with little notice.

A little contingency, a couple of months of everyone’s salaries, for example, can make a massive difference and allow for a better night’s sleep.

CFO tip #5: Prepare for the unexpected: A contingency fund can be a financial lifeline in volatile times.

6. Finalize your business budget draft

Consolidate all inputs, analyses, and discussions into a final budget that clearly outlines planned expenditures and anticipated revenues for the upcoming year. The final budget plan should include the forecasted spending, line by line, covering all the business costs, as well as planned activity for the year ahead. This budget now clarifies your whole company and allows department heads to start deploying their tactics, get stuff done and contribute value back to the company.

CFO tip #6: Clarity and direction for all: This comprehensive budget empowers department heads with the knowledge and resources needed to execute their strategies effectively. With our solution, you can automatically enforce spend controls, set limits, custom approval flows, and issue physical and virtual cards for employees, empowering finance controllers to execute your vision.

Four tips to stay in control of your business budget

The real challenge begins after finalizing the budget and approving costs: ensuring the financial ship sails smoothly towards its targets without veering offcourse. Here’s a comprehensive guide on maintaining a tight grip on your budget with precision, backed by our solution's powerful capabilities.

1. Regularly review your costs and compare them to your budget projections

Businesses might budget annually, but it would be a mistake to say that budgets are a once-a-year, set-it-and-forget-it thing. Think of your budget not as a static document but as a living entity that needs regular health checks. Monthly close-outs and performance comparisons against budget projections are not just good practices but essential rituals. This disciplined approach, enhanced by our real-time analytics, allows for early detection of discrepancies, enabling swift corrective measures.

Having the discipline to close the month and compare to projections can raise some early red flags, preventing any damage.

2. Writing clear expense policies

Clear expense policies are your financial guardrails, ensuring that every dollar employees spend is in line with company objectives. These policies breakdown the costs incurred by business into typical expense categories, including staff entertainment, client entertainment, transport, food, and accommodation, and integrate them into your budget plan.

CFO tip #7: Design effective expense policies and automate them with the right software. Only this streamlined approach can help you answer questions, like : "How much can be spent on staff entertainment per quarter?"

3. Issue cost-center-specific corporate cards for spend management

Assigning corporate cards to cost centers is a leap towards empowering your teams. We take this even further by offering cards with preset spending limits and workflows, ensuring that all expenditures are pre-approved and within budget. This not only simplifies the procurement process but also provides finance teams with a real-time ledger of transactions, maintaining a constant pulse on the financial health of each department. With our corporate cards, finance teams also get to access real-time information on spending, which is another way to cross-check what is being spent, on what, and where.

4. Work with department heads to ensure collaborative budget tracking

Whether you can offer corporate cards to your employees at this time or not, you still need to ensure that every cost centre to the business has a sound method to keep track of expenses. Let’s say that the Marketing Team has an annual budget of $100,000. However, four months in, the CEO has already seen invoices for a total of $60,000. This would make them nervous, wouldn’t it?

However, if they work closely with the head of that team, they might see that they have a budget tracker that plots costs per month and available left. Knowing that they have the discipline to manage their costs would be reassuring. We facilitate this collaborative environment, offering dashboards that department heads can use to monitor their spending against their allocated budgets, ensuring transparency and mutual accountability.

Navigating budget overruns

Even with the best plans, budget overruns can occur. It’s essential to approach these situations with calm and strategy rather than panic. Depending on the size of the problem, you will need to look at different costs that can be cut.

CFO tip #8: Tactical expense cuts: Identify non-essential spending areas that can be temporarily reduced. Discretionary expenses like corporate events can be scaled back without impacting the core operations. Payhawk’s flexible expense management system allows for quick adjustments to spending limits and policies, enabling responsive action to financial strain.

Most employees will be okay with having a smaller Christmas party if it means keeping the business well. But If the issue is more than one party away, try leveraging better payment terms with suppliers.

CFO tip #9: Try to leverage better payment terms in times of need: Sometimes, navigating through a tight financial period requires leveraging the breathing room provided by supplier payment terms. At Payhawk, our supplier management dashboard can help you prioritize payments to core suppliers and review all payments and supplier data in one dashboard.

Waiting for another billing cycle can be enough to weather the storm and make the most of the payment terms offered by suppliers and creditors.

Conclusion: Steering financial Success with Payhawk

Controlling your budget is an art and science, requiring constant vigilance, strategic thinking, and the right tools. We empower CFOs and finance controllers with a comprehensive suite of features designed to simplify expense management, enforce budget policies, and foster a culture of financial accountability. By integrating Payhawk into your financial strategy, you ensure that your company stays on course and adapts and thrives in the dynamic business landscape.

At Payhawk, ourexpense management software is an ideal companion to the art and science of budgeting. This is because it allows finance teams to control and safeguard spending on anything from subscriptions and marketing costs to discretionary spending all from one integrated platform. Giving employees company cards with spending limits, control workflows, and real-time dashboards will help you keep tabs on money coming out and empower them to spend when they need to, without using their funds.

Why not book a demo to learn how to use real-time data to keep in control of your business spending?