This post was in partnership with Wells Fargo. Originally posted on Wells Fargo Works.
One of the more challenging aspects of running a company is determining how to best allocate the company’s revenue according to a budget. Oftentimes, a company will begin the year with one idea and, midway through, realize that they want to take a different direction. This can lead to uncertainty about how to best manage cash flow and how to adjust projections.
The key with business budgeting is to always remember that a budget is a fluid document. It’s merely a guide for you to use to determine your next best move, and it is OK to adjust it throughout the year.
Estimate your annual budget
When you’re creating your annual budget projection, you may want to consider applying the 60/20/20 rule. Generally speaking:
60% of revenue should be used for fixed expenses. This includes salaries, overhead expenses, reserves for tax payments, and the company’s profit goals.
The first 20% should be dedicated to growth. This may include investing in marketing, advertising, and other initiatives to expand the company’s brand and reach.
The second 20% should be designated for internal development. This could include R&D for products-based businesses or training for staff members to improve their skill sets and leadership abilities.
Create quarterly budget goals
Every 90 days or so, you should aim to check in on your annual budget projection. To help with this, you also need to create four separate quarterly budgets. When planning your quarterly budget, work with your team to decide on the number one objective for each quarter. It could fall under one of three categories:
Growth: Pushing your business into a growth phase
Stability: Remaining stable and consistent
Research and Development (R&D): Increasing your service level with an advanced technology investment or internal team training
Adjust based on your needs
Keep in mind that the 60/20/20 rule is a guide. Depending on your quarterly objective, you may need to tweak these percentages. For instance, if you are developing a new product to bring to market, you will likely need to increase the percentage dedicated to internal development, and decrease your funds allocated to growth.
Once that product has been created and is ready to go to market, you may reduce the amount devoted to R&D from perhaps 30% or 35% back down to 15% or 10% and re-allocate the remaining funds to growth. At this point, you might consider increasing the percentage of revenue dedicated to growth to 30% or 35% in order to pay an outside branding consultancy to help you package and position the product, work with a marketing agency to help you spread the word, and later work with an advertising agency to help you increase sales.
If you are a service-based business, you may decide to focus on developing your staff at a specific point in the year, which will increase the amount of money that the company is using for internal development.
The key to business budget planning is flexibility when it comes to your objectives and quarterly budgets. This will help drive your budgeting decisions and keep your business on track.
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