The prospect of creating a budget can feel a bit like that college term-paper – homework that you do not want to do. You know you need to do it, but you would rather do so many other things.
Budgeting is an important task, and, if done with the right mindset, can be a fun exercise. T3 Sixty has worked with many real estate brokers on creating budgets and, through that experience, has gathered many best practices and useful tips for the process of creating a budget.
Companies over a year old can use their previous year's financials as a template to create a line-item budget. In this case, they can simply increase or decrease their income and expenses accordingly. Those under a year old or who have not maintained proper financial reporting, below are six proven steps to establish a solid budget.
Step 1: Start with fixed expenses
Examples of these types of costs include rent, leases and salaries, and are a natural starting point that can knock out a large portion of the work involved in creating a budget.
Be sure to include owners’ salaries in the calculation. Far too many owners do not include their salary in the budget. Note that it can be increased as profit grows.
Step 2: Budget for profit
This may sound obvious, but a surprising number of business owners budget to break even. While it might seem like a logical idea at the start, it is not a smart way to plan a business. Set targets on achieving a profit. This is nonnegotiable.
Step 3: Establish controls for variable expenses
When it comes to expenses such as marketing and office supplies, implement checks and balances to control spending, such as an approval process. With controls in place, large invoices will not pop up as surprises and throw budgets out of whack.
Step 4: Apply business strategy to the budget
Companies not only need to track their income and expenses on their general ledger, but they should also reflect a growth strategy. Companies moving into a new market or planning to recruit or acquire more agents, for example, must increase their budgeted income (and expenses) accordingly.
Step 5: Use details only where it matters
It is easy to put too many or too few details into a budget. This requires some care and, in some cases, guidance. Best practices dictate companies including more information in short-term planning and less, more critical information for longer-term planning.
Step 6: Plan for the unknown
Things do not always go according to plan. Because of this, a smart budget plan involves including a “what-if” analysis. In this industry, it is not unusual for disruptions or drastic changes to occur. This makes it essential to develop a flexible budget and forecasted its performance under varying scenarios.
A budget is a living, breathing thing. It is not a set-it-and-forget-it activity. Leaders should regularly evaluate and modify budgets and business plans as needed. At the very least, companies should review their budgets monthly, keep them on hand, reference them often, and make changes where and when needed.