The process of matching real and anticipated expenses to revenue is critical to the success of any business. Budgeting is a crucial tool for small, and big business owners to establish if there is enough money to finance its operations, support potential growth and also generate income. In the absence of a proper budget or plan, an organization runs the risk of using up more money than it is making, and at other times, it could under spend and consequently miss out on the opportunities for growth. Here, entrepreneurs will learn smart budgeting tips that they can implement to improve organisational performance, profitability, and chances of expansion.
Importance of having a budget
Small business owners, especially the ones who are just starting off choose to run their businesses in a relaxed manner, and often, undermine the importance of a budget. They fail to understand that when planning for the future, such plans will be in need of funds. Proper budgeting provides an effective way of controlling the cash flow, besides making it possible for the organization to grab new opportunities for growth promptly, and with minimal financial difficulties.
When a business is expanding, it is almost impossible for the owner to be hands-on with all the areas. A need of splitting the budget up between different areas like marketing, production, and sales and so on arises. Money begins to move in the many different sections of the organisations. At this point, only a budget can help to ensure that expenditure is kept under control.
The budget acts as a plan for:
1.Controlling the company finances
2.Ensuring that the business can meet its short-term financial obligations as and when they mature.
3.Enabling the business owners or managers to make informed financial decisions that allow them to meet set objectives.
4.Ensuring that the firm has sufficient money to run its future projects.
Care should be taken to avoid confusing a budget with a forecast. Whereas a forecast predicts the future, a budget is only a planned outcome of the events of the future. A budget is constructed based on the plan that the business aims to achieve.
Creating a successful budget
It need not be a complicated process. A successful budget should help a business owner to allocate resources in the different areas of the organization fairly in a manner that guarantees both profitability and growth. It is a process of working the possible income and expenditure of a given budget period.
Factors to consider when formulating a budget include:
1.The projected sales for the period you are budgeting for. Be careful not to overestimate as this can result in problems in the future
2.The direct costs of the projected sales figure. Keep into consideration elements such as the cost of materials, direct labour and overhead. The cost of sales does not include administrative, general and selling expenses.
3.The fixed costs and overheads which need to be broken down by type. They include the cost of premises, staff costs, utilities such as lighting and heating, equipment costs, expenses associated with vehicles, printing, postage and stationery, advertising and promotion, travel expenses, legal and professional costs and insurance.
To facilitate the creation of a realistic budget and plan, use the following steps:
1.Set aside enough time to create a comprehensive and realistic budget. A carefully created budget is not only easier to manage, but also effective.
2.The previous financial year’s figures should only be used as a guide. Besides the information on past sales and expenses, put into account the sales of the company, the intended use of the sales resources, as well as the changes taking place in the competitive environment.
3.The importance of creating realistic budgets cannot be overemphasised. The available historical information, operational changes and business plan will come in handy. After determining the relationship between variable costs and sales, it should be easy to project variable costs with the help of the forecasted sales. The information available on the budget should be sufficient to permit monitoring of the key drivers of the business such as sales, working capital, and overall costs. With the right bookkeeping services for small business or accounting software, a realistic budget is achievable.
4.Determine the right people to involve. Employee engagement in serious matters that affect the organization is in itself a motivating factor. Business owners should engage employees who are tasked with financial responsibilities to provide estimate figures for the budget.
Two final thoughts:
A business owner or manager should decide how many budgets to maintain at any given point. The majority of small businesses manage a single operating budget. As the company expands, there will be a need for several separate budgets such as sales, production, and marketing budgets. Finally, no budget is ever static, and as such, it should be revisited on a regular basis.
By: Lee Flynn