How to Budget: Creating Budget Priorities for Your Middle Market Business
As with so many other strategic initiatives, knowing how to budget for your middle market business is largely about knowing your capabilities and how you want to leverage them in order to maximize return. Budgeting is the careful process of putting your money where your strategy is. The first step of budgeting is making clear connections between your available capital and your middle market company's strategic goals. Once that's done, you can begin making a long list of budget choices, places, purchases or projects where you believe investing capital will generate strong returns and align with your strategy.
Budget Wish List
After forming a strategy, the next step is making your budget wish list. Once you've put the list down on paper, it's time to estimate the cost and potential return over time (the payback period) for each of these potential budget investments. Why is a particular budget option a good idea for growing your business, and when will it start generating profit? When considering how to budget and deciding priorities, it's a good idea to have three general categories:
- Investments you must make
- Investments you should make to support growth
- Investments you'd like to make, assuming you have the means to finance them
Let's look at each of these three budget priority categories.
Investments you must make. Your first investments, which should be of the highest priority, are the no-brainers in your budget: basic necessities such as rent or mortgage obligations, salaries for your employees, office supplies and office equipment, insurance, utilities and more. You can estimate these costs by using last year's figures as a foundation and tweaking them depending on how the costs are trending. These budget items are simply the cost of doing business, and covering them is the first budgeting action that you should plan for.
Investments you should make to support growth. The second category of investment priorities involve areas that aren't basic needs but should lead to growth. If you offer services, for example, you really should be investing in training for your employees so that they can deliver a superior level of quality service. If your equipment is getting older and your maintenance costs are increasing, you should consider replacing obsolete equipment with updated, more efficient models. In short, these investments will allow your middle market company to deliver a better product or improved service and keep you growing.
Investments you'd like to make, assuming you have the means to finance them. Lastly, there are budget priorities that may seem like dream investments but still align well with your middle market company's strategy of long-term growth. They might involve initiatives to find and attract new customers, or upgrades to your IT infrastructure that put you on the cutting edge of technical capabilities. These items can give you a competitive advantage for the long term, but by the same token, will achieve a return on investment over a longer time period. Nevertheless, these investments may represent the future foundation of your growth. The larger question is whether you have the cash flow to invest in them, or if you can arrange financing for them. Obviously, you'll need to include the cost of capital into the total cost of these investments.
Decisions concerning budget priorities can seem risky, and they might be, but oftentimes the cost of not investing in the right areas can be even riskier. Your competitors may invest wisely and pass you by. Making the right decisions requires knowing yourself, your industry, and the potential return on the various investment options that you're considering. The solution is to make priorities that reflect the investments that you must make, that you should make, and that put your capital in areas that can create a competitive advantage for your middle market business in the long term.
How do you keep track of your budget priorities? Let us know what you think by commenting below.
Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.