What is Budgeting?
A budget lets a business owner measure its performance in an objective manner, control cash flows and allows him to invest in new opportunities at the appropriate time.
An effective budget also highlights business decisions that require attention to enable smooth future operations.
Since small business is not a black and white affair, the first budget you prepare often uncovers problems with your plan and helps in improving on those.
A well-planned small business budget will be based on the below factors:
1) Estimation of Income Sources
The first step towards a good business budget is to figure out how much money is brought into the business. One needs to start with the sales figure first and then additional income sources apart from sales.
A peep into the past trends
You need to review your past incomes and expenditures and do a quick trend-analysis. This will give you an idea about your expenditures trend and accordingly you can make a plan to save money in the future. Several factors have to be considered like an underestimation of the costs of certain items and the instances where savings were done. This further helps up in re-shaping and sticking to the current year’s budget. For example, if new machinery costs more than expected due to certain hidden costs, you’ll need to add a contingency buffer for the year ahead.
b. Don’t underestimate the value of “Time”
Time is money too. Factor this into the budget as well and it will play a major role in saving your unnecessary expenses. Before outsourcing any service, one needs to calculate and compare the cost which in incurred in outsourcing vs. the earnings you can bring by saving that one hour work you have outsourced. Factor in your own time before deciding if you’re really making any savings.
2) Understanding and Managing Risks
The risk is an unavoidable part of any business and each risk can financially impact one’s company in many ways. Every small business owner needs to consider his long- and short-term risks to accurately plan for the financial future.
It is important for all small businesses to identify, be prepared for and have the required measures ready for the potential risks on a short- and long-term basis. Once the threats to productivity are mapped out properly, an effect can be done related to emergency situations, insurance needs, etc. The best way to understand risks more clearly is to list your guaranteed income and expenses each month.
- Product/Services Sales
- Hourly Earnings
- Investment Income
3) Over-estimate future expenses
Many of the purchases can actually be scaled up or down depending on the state of your business. Also, there are many small but unavoidable expenses that add up to your budget during regular business operations. Hence, it’s always advisable to opt for budgeting slightly above the anticipated line-item costs to keep a check on overspending.
- Government and bank fees
- Cell phone
- Website hosting
- Accounting Services
- Legal Services
- Raw Materials
- Contractor Wages
- Other Marketing Costs
- Travel & events
- Printing Services
- Other petty expenses
- Office Supplies
5) Constant pre-defined savings
It might be tempting to splurge after a successful month or two but it becomes imperative to save a certain portion of the income you receive. Business tends to overspend without realizing at a certain point. To avoid this, it’s advisable to at least save 30% per cheque to account for taxes and to accrue savings.
6) A need for an Emergency Fund
For start-ups, it’s challenging to put aside money for contingency situations, simply because the budget is already tight. The key is to analyze the situation well and stick on the budget so that there are always some extra funds to spend on emergencies.
Cash flow is usually a major challenge for small businesses, so being mindful in your spending can help you to put aside a sum of money every month, just as you would in your personal budget.
7) Reviewing your Budget
A budget needs to be constantly revisited and monitored for the better control of expenses and make wiser financial decisions. In addition, considering past market trends help to witness any potential risks ahead. From there, one can factor in emergency funds and unexpected costs. Budgets should be updated constantly to enable the person to be flexible and also helps to manage the cash flows better.
The following factors should be considered while reviewing your budget:
Actual Incomes – Comparing your income with the budget is important and also analyzing the reasons for any shortfall – for example, lower sales volumes, underperforming products etc. Also, comparing the timing of your income with your projections and checking that they fit
Analysis of these variations helps in the execution of budgets more accurately and also allows you to take remedial action where required.
Actual Expenditures – One needs to regularly review the actual expenditure against the budget. This helps in predicting future costs with better reliability. Also, one needs to verify if your variable costs were in line with your budget, the analysis of any changes in the relationship between costs and turnover and finally the analysis of any differences in the timing of your expenditure, for example by checking suppliers’ payment terms