Running a small or medium business has never been simple. Research indicates that 82% of companies fail due to cash flow problems in their early years. Moreover, late payments account for 25% of SMB bankruptcies in Europe, while in Latin America more than 50% of small businesses close before completing two years.

The truth is clear: many SMBs ignore budgeting until it’s too late. However, when used correctly, the budget becomes a strategic roadmap that helps not only prevent risks but also accelerate growth.

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Budgeting is not bureaucracy

The budget is a survival and competitiveness tool for companies of any size, not just corporate giants. Although it is often associated with large organizations with complex financial structures, the truth is that it is a fundamental practice for any business, especially those just starting out.

To make this practical, we’ve gathered seven key strategies that can help any small or medium-sized business turn the budget into a business ally, based on expert recommendations, recognized consulting studies, and real-world market cases.

1. Put Cash Management First

One of the biggest mistakes SMBs make is focusing only on accounting profit (Income Statement) while neglecting cash flow.

Michael Dell, founder of Dell Technologies, summarized this brilliantly:

We were always focused on our profit and loss statement. But cash flow was not discussed regularly. It was like we were driving only looking at the speedometer, when in fact we were running out of gas.
— Michael Dell, Founder of Dell Technologies

To understand how money circulates within the company, it’s essential to observe how long it gets stuck in each stage of the business: in inventory, in the time customers take to pay, and in the time the company has to settle with suppliers. The following table shows how to calculate these terms and, in some cases, provides alternatives for more accurate values.

Indicator	How to calculate
Average Collection Period (ACP)	Accounts Receivable ÷ Daily Sales OR Weighted average of receivable payment terms
Average Payment Period (APP)	Accounts Payable ÷ Daily Purchases OR Weighted average of payable terms
Average Inventory Period (AIP)	Average Inventory ÷ Daily Cost of Goods Sold OR Weighted average of expected sale terms for items in inventory
Cash Conversion Cycle (CCC)	ACP + AIP - APP

Together, these terms determine the working capital requirement. The longer the cash conversion cycle, the greater the need for bank loans or shareholder capital, increasing the financial cost of operations.

2. Implement Zero-Based Budgeting

Zero-Based Budgeting (ZBB) is a methodology in which every expense must be justified from scratch, without relying on prior values. Unlike incremental budgeting, which simply adds or reduces percentages on top of last year’s budget, ZBB forces the company to rethink its assumptions, questioning each cost and evaluating whether it truly generates value.

Practical example of a ZBB assumption

Imagine a company that should spend R$ 0.20 on packaging for each sale. However, in a month with 1,000 sales, it turns out the expense was R$ 350.00 — because the buyer tends to repeat the amount they always purchase, rather than aligning with the actual sales volume.

By adopting ZBB, the company starts planning packaging costs based on the expected real sales volume for the month.

Packaging = Sales Qty x 0.20

Month with 1,000 sales => Packaging = R$ 200.00
Month with 1,500 sales => Packaging = R$ 300.00
Month with 2,000 sales => Packaging = R$ 400.00

Note that this model automatically adjusts costs to the business reality and avoids waste.

3. Adopt Artificial Intelligence (AI) and Automation

Artificial intelligence, once limited to large corporations with high technology budgets, has become much more accessible in recent years. Today, simple and low-cost solutions are available under subscription models, integrated into management systems, or even as standalone apps for small businesses. This simplification allows SMBs to use automation and advanced analytics to support decision-making.

With modern AI, integration, and automation tools, SMBs can greatly optimize their financial and budgeting processes

Some practical applications of AI and automation in financial planning and control include:

Cash flow forecasting
Revenue growth opportunity analysis
Outlier and anomalous spend detection
Scenario creation
Simulation of the impact of financial decisions
Automatic generation of plain-language reports
Goal-setting support based on historical data

4. Implement Periodic Budget Reviews

A common mistake in SMBs is building the budget only once a year and never revisiting it. However, the reality of small businesses changes constantly.

To keep the budget alive, the company should establish a review cycle. A suggested three-step review process is shown below:

Each month, compare budgeted values with actuals. Identify significant variances (positive or negative) and try to understand the drivers.
Every three months, use the monthly review data to make fine-tuned adjustments. If a recurring expense is higher than expected, update the projection for the coming quarters.
At year-end, use the quarterly reviews to plan the next budget more accurately. What was learned throughout the year becomes the basis for new financial targets.

5. Use Scenario Simulation

Working with different scenarios (realistic, optimistic, and pessimistic) enables the company to be prepared for market changes and internal contingencies. Below is a helpful example to build these scenarios in a practical way.

Example of scenario simulation

A telesales cosmetics company estimates its monthly revenue based on the following formula:

It faces revenue fluctuations due to factors such as reduced average ticket when running promotions to hit targets and salesperson absences during seasons with a higher incidence of respiratory illnesses, in addition to changes in sales volume driven by competition.

Revenue = TM x QV x DU x VD

TM = Average Ticket
QV = Daily Sales per Salesperson
DU = Working Days
VD = Number of Salespeople per Day

In its planning, the company can estimate revenue by considering different scenarios and the variations mentioned, as in the table below:

Scenario	Assumptions	Revenue
Pessimistic	TM = $ 320.00 QV = 8 DU = 22 VD = 4.7	$ 264,704.00
Realistic	TM = $ 350.00 QV = 10 DU = 22 VD = 4.9	$ 377,300.00
Optimistic	TM = $ 380.00 QV = 11 DU = 22 VD = 5.0	$ 459,800.00

5. Conduct Regular Expense Analysis

Another essential practice is to periodically review expenses and seek efficiency opportunities. Many SMBs, due to lack of time or resources, fall into the habit of simply paying recurring bills without questioning them, which creates room for invisible waste.

A careful analysis often reveals unnecessary costs across different fronts: materials purchased in excess, services and subscriptions no longer used, inefficient internal processes, or administrative expenses that could be adjusted. It’s also common to identify opportunities in purchasing and negotiations: supply contracts that have never been reviewed, unfavorable terms, or prices that no longer reflect market reality. Even small expenses, such as bank fees or office supplies, can add up to significant amounts over time.

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Payroll

A complex yet critical expense to analyze is payroll, as it often represents the largest fixed cost for companies. It’s important to verify whether the team is sized proportionally to demand and whether productivity gains keep pace with business growth.

7. Adopt Value-Based Budgeting

Finally, it’s crucial that budgeting doesn’t become a suffocating process. For SMBs, it must be flexible and value-oriented. This means each investment or expense should be evaluated in terms of strategic impact and suitability to the company’s stage and size, rather than following best practices, academic concepts, or management gurus without criteria.

You should also avoid so-called “blind cuts”: automatic reductions in areas that drive results or are strategic for the future. By categorizing expenses based on their contribution to business objectives, managers can make smarter decisions — including increasing spend in some areas while reducing it in others.

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Strategic Investments

Often, spending more on marketing or innovation—leveraging cuts made in low-impact areas—can be the key to achieving future gains, even if it means giving up immediate results.

Conclusion

Effective budget optimization is a critical capability for SMBs navigating today’s challenging business environment. By implementing these seven strategies, you can not only reduce costs but also build a more resilient and agile financial foundation for your company.

Remember that the goal isn’t simply to spend less—it’s to spend smarter. Focus on maximizing the value of every dollar spent, and you’ll be on the right path to building a more profitable and sustainable business.