Off The Beaten Track

For Small Business Owners: Guidelines for setting up a budget for your business

Source: LinkedIn

A lot of the time starting a business and getting your name out there is so important that simple things like managing your expenses and keeping a close eye on your cash flow fall by the wayside. The phrase ‘cash is king’ is relevant for a reason. Money is the the lifeblood of your business so you need to always make sure that it keeps flowing, and it flows in a healthy way. We won’t go into the gory details of accounting and cash-flow statements just yet but we’ll share a few simple tools to help you get an idea of what your budget should consist of.

Why Budget?

A budget helps to keep track of and measure your business performance. You can use a budget during the decision making process, both short and long term. It’s difficult to make objective business decisions if you don’t have a clue how money moves around in your business. Another thing to keep a close eye on are your business’ key drivers: sales revenue, cost and working capital. (Working capital should not be confused with cash flow.)

Businesses don’t operate in the same way therefore there isn’t a standard one-size-fits-all approach to setting up the perfect budget. In fact the ‘perfect’ business budget probably doesn’t exist. The structure of your budget depends largely on what type of business you’re running. A business that renders a service might bill by the hour and that’s their unit of measurement. Another business sells inventory and so their revenue and budget is impacted by the rate at which stock moves. Keep in mind the context of your specific business when going through these guidelines.

  1. Decide on a time period: You need to decide whether you’ll draw up your budget on a biweekly, monthly, or quarterly (etc) basis. You might find that you have to use a combination of time periods. This is also OK as long as you keep a close eye on the numbers so that they correspond. For instance your credit cycles might differ from fixed monthly cost cycles like rent, electricity and so on.
  2. Distinguish between forecast/budgeted and actual cost: This is important. Your budget needs to reflect what you think you’ll spend and the actual cost. You can use past figures to workout what sort of expenses and income you’re anticipating. You can use a combination of monthly, quarterly and yearly comparisons to work your numbers.
  3. Identify business costs and categorise them: Understand the difference between fixed costs, variable costs and fixed-variable costs and make provisions for all three when drawing up your budget. All three categories should compare FORECAST/BUDGETED COST, the ACTUAL COST and the DIFFERENCE between the two.
  4. Identify sources of income and categorise these: You will find that some businesses will have a fixed income stream (rent). Whatever the source of income, be it directly from sales, investment income or any other source, it needs to be accounted for in your budget. Again, be sure to have FORECAST/BUDGETED INCOME, the ACTUAL INCOME and the DIFFERENCE.
  5. Be realistic with your forecasts: If you’ve sold 10 to 15 units of something in the past 3 months, what are the chances you’ll sell 15000 in the coming month? You may find that certain businesses are subject to seasonal flows. For instance, most retailers experience a surge in the last quarter of the year because of seasonal shopping. If that is the case, keep a close eye on your numbers and make adjustments accordingly.

The distinction between forecast costs/income and actual costs/income will help highlight any troubles if it is a negative difference. A negative difference might indicate several an like inadequate pricing. A positive difference will either point to an opportunity that you could exploit. If you’re working with inventory, you’ll also need to look at stock holding and stock turn. Holding too much stock costs you, but holding too liitle and selling it fast might mean you’re not operating at full capacity. Either way, look to your budget to get a full picture of what’s happening in your business and what you need to change in order to get to where you want to be.

If you find yourself struggling, you might want to get help from a professional accountant. They are costly, but so it losing your business.

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