Small business owners continue to face challenges and opportunities in today’s economy. Planning for what might come next is critical – both at the macro level and with the more controllable aspects. According to PNC's latest semi-annual survey of small and mid-sized businesses, 56% of firm owners are optimistic about the national economy, significantly up from 34% a year ago.[1] What's more, 64% of businesses expect an increase in demand for their products or services over the next six months. As sentiment about the economy and industry-specific trends ebb and flow, small business owners could consider carefully planning their annual finances.

A good first step in building a business budget is to simply assess spending trends over the year to help create comprehensive visibility into your expenses. An accurately planned budget might provide an advantage in your business strategy and point to the best allocation of financial resources. Here are three key activities to consider:

1. Conduct an Annual Spending Review

To analyze where your dollars have flowed most recently, bucketing certain spending areas into specific categories might help you more easily spot where costs have spiked, and which segments may have been neglected. Here are some tips:

  • Inspect your financial statements: Review your income statement, balance sheet, and summary of cash flows. Taking a comprehensive approach to treasury management using these documents may offer a solid snapshot of where you are and where your business came from.
  • Bucket your costs: Categorize all expenses and then separate them into either operational, payroll, marketing or long-term capital costs. Once you’ve finished this task, ask yourself if the mix best suits the optimum way to run your business.
  • Performance variance analysis: It might sound like a job for an accountant, but comparing your actual annual figures to your previous budget is not all that daunting, and it could be important if you seek to improve your financial practices and construct an accurate future business budget.
  • Determine returns on investment (ROI): Because a primary point of investing in your business is to generate profit, understand if your resource-allocation strategies were worthwhile by linking gains to expenses. For instance, if purchasing new tech equipment led to a profit boost then that could be an area to emphasize in the coming year.

2. Build A Smart Spending Strategy

With a clear look into current-year spending patterns, you’re equipped to craft a budget that balances the right amount of spending with the desire to grow. Here are some facets of a sound budget:

  • Focus on what’s most important: Consider dedicating the most time and detail to functions that support your core business and less energy to smaller segments. For a services company, that might mean analyzing what particular features your customers value. If you produce goods, then tallying the best-selling items helps uncover the highest revenue-generating products. Skimping on your core offerings could be a mistake, so don’t be quick to reduce costs here.
  • Seek to maximize your top line: After prioritizing your core business areas, allocate financial resources and human capital to those revenue centers. That might mean adding people to your sales team, shoring up cash for research and development, or increasing your marketing budget.
  • Build in a buffer: Experienced entrepreneurs recognize that business rarely goes according to plan. Mistakes happen, economic conditions change, and you might over- or under-forecast in various categories. Plan for that. Setting aside a cash buffer, or access to affordable capital, to cover unexpected expenses or a sales soft patch can prevent the need for reactionary cost-cutting efforts that could harm the business.
  • Keep a long-term perspective: Understand that there will be speed bumps along your business’ growth journey. That’s easier to say during the calmness of budgeting, however, try to keep your cool when times turn stressful throughout the year. Avoid the temptation to enact excessive short-term spending cuts. Instead, focus on strategic initiatives that have the potential to pay off over the years to come. Such investments could include AI-enabled technology upgrades or investing in your staff.

3. Control Costs Without Compromising Growth

Building a budget and evaluating a smart spending strategy is sometimes the easier part of planning for the new year. What is often more challenging is to know when to pull back on expenses without negatively impacting the firm’s growth trajectory. The good news is that you don’t have to sacrifice revenue expansion for the sake of cost control. Try these tactics to reduce spending while still executing a growth-centered business plan.

  • Review vendor terms: Being a successful small business owner occasionally requires negotiation with current vendors or exploring new supplier relationships. For example, asking for refreshed or even discounted rates in exchange for higher volume could be a win-win. Also, look into teaming with local suppliers for more favorable terms.
  • Right-size or right-fit your staff: Reducing staff is not the only option for balancing your payroll budget. You can reinvest cash flow in new technology or software to help optimize workforce efficiency. Moreover, leaning into today’s flexible work arrangements could help cut back on office expenses while increasing productivity and employee morale.
  • Focus on cash flow trends: Your top and bottom lines are important, however, having a gauge of when cash runs low throughout the year provides proper insight into your business' best strategies. Likewise, periods of rising liquidity offer the chance to adjust your budget as needed to hit your goals. Always review your short-run revenue and expenses and consider investing excess cash flow in automation technology to build your cash coffers over the long haul.

Preparing For Future Success

Constructing a business plan that controls costs and allocates resources effectively is no small task, and going at it alone could be a mistake. Partnering with PNC Bank can help you spot parts of your business where spending might be too aggressive. With diligent planning, you can build a sound budget that covers all the company’s financial bases while laying the groundwork for year-over-year growth.