Article provided by Noble Prosperity
It’s that time of the year when business owners are planning business and projects for the new year. But alas, January is but a distant memory and our budgets and cash flow projections for the new year have still not been finalized.
I get it. We all get busy with hustling for business and the financial management of our businesses are treated like the redhead stepchild.
Creating a budget can be daunting but operating a business without a budget leaves you flying blind.
Budgeting is an integral part of your business which allows you to create a spending plan for your money. Creating this spending plan allows you to determine, in advance, whether you will have enough money to do what is required. Budgeting is simply balancing you expenses with your income. Following a budget or spending plan will help keep you out of debt or to manage your debt
Used correctly, a budget is the map of the company’s strategic plan. Once in place, the budget becomes a valuable benchmark to determine how well the operations are meeting the objectives.
Forecasting the cash flow statement is a valuable exercise to guide the business owner and the executive team to measure success or failure.
Your budget needs to account for fixed and variable incomes and expenses.
- Fixed expenses include rent, utilities, phones, internet, accountant and legal fees, technology-related expenses, salaries, advertising and marketing.
- Variable expenses include costs of goods and commissions
Most bookkeeping and accounting software offer budget integration with actuals which is great for up-to-date reporting. Most of the software programs now also offer cloud options which is great for business owners and bookkeepers alike.
Budgeting tips for business owners
- Identify and involve decision makers in the organisation and involve them in the budget creation process.
- Use technology to coordinate and consolidate the budget.
- Create a budget that reflects the organisations’ strategic plan.
- Identify issues quickly and create a plan for immediate resolution.
- Define and understand your risks – list your guaranteed monthly income and expenses to understand your risks.
- Don’t underpay yourself.
- Overestimate expenses –projects often have costs that were never anticipated.
- Pay attention to your sales cycle – understand the impact of busy and slow periods.
- Time is money – timing underestimation directly increases costs.
- Involve your employees – keep employees updated on short- and long-term financial goals.
- Revisit your budget regularly – budgets are not static and will evolve with your business.
Benefits of budgeting
- Projects annual expenses but allows you to see the costs as they occur.
- Assists with managing cashflow.
- Forecasts bottom-line using more than one revenue stream.
- Price setting
- Before setting prices, you need to know your manufacturing and overhead costs.
- A budget allows you to project operational costs such as rent, utilities, wages and marketing.
- Budgets identify areas where you can reduce costs.
- Capital and credit procurement – securing finance
- When sourcing finance for your business, financial records are required. These financial records include budgets, management accounts, asset & liability reports, and annual financial statements
- Budgets allow you to track the business’s performance throughout the year, allowing you to make the necessary adjustments as required. For example, if sales are slow the budget will identify areas for possible adjustments such as cutting costs.
How to set up a budget
- Examine your different sources of revenue.
- Subtract fixed costs.
- Determine variable expenses.
- Set aside provision funds.
- Make a profit & loss statement.
- Create your projections.
For a budget to have any value, it is important to measure the budget against actuals.
Remember that the budget is a roadmap, not set in stone. It is there to guide you and in the initial phases may be adjusted several times before you have the final version that will be applied annually. It is important to understand the data reflected in the budget and to have the agility to change where needed. Experience in business will guide you when to implement changes and when to ride out certain turns in business.
If budgets still have you overwhelmed and you need help and personal attention pop me a message on LinkedIn.