Every month large organisations pour over budgets, Analysiing variances, updating forcasts.. But what about Small Businesses? Should they budget too? Absolutely. If you don’t prepare a budget you have nothing to aim to. Budgeting will assist with business planning and cost control ultimately success.
What Is a Budget?Although you might not know it, you prepare a budget each time you estimate how much cash you will have left at the end of the month after paying your bills.
A budget is a forecast of all cash sources and cash expenditures. It is organized in the same format as a financial statement, and most commonly covers a 12-month period. At the end of the year, the anticipated income and expenses developed in the budget are compared to the actual performance of the business as recorded in the financial statement.
The budgeting process takes a number of steps the first I would suggest is profit and loss forecast. This involves taking last years monthly profit and loss statements and teasing out budgeted figures for the following month/ year in a spreadsheet. For example if your sales in February 2010 were €70K but you know you have a new sales person and better products this year you should be budgeting for €100K
If your phone bill was €1k last March and you’ve changed providers and negotiated a discount you can lower this amount. Its extremely important to be realistic with these figures. Otherwise the whole budgeting process is a waste of time.
Once you have extrapolated out the monthly profit and loss figures you now have the basis of your budget. Remember your budgeting is an ongoing process. Theres no point in preparing a budget and sticking it in a drawer for the year. You need to constantly measure your results against your predicted budget figures and catch small problems before they become an issue.
Here are our tips to making budgeting work for your small business
- Update the budget every month and analyse your variances. If you have your budget set up correctly in a spreadsheet this should be a simple case of plugging in figures.
- Set up a very simple system for your budget. If it takes too much time, you wont do it. `
- Build up a cash reserve. Budgeting should help you control costs and cash flow. In uncertain economic times a cash reserve will help you sleep at night
- Be Conservative. Expecting a 40% sales increase in one month for no apparent reason is not going to end well. If your constantly missing your targets you will become deflated.
- Be Flexible. If one of your figures is way out for example you purchased new equiptment which wasn’t planned, you may find production has increased to matcth this.
- Accept that budgeting is a form of estimation and by that nature it will never be perfect.
- Don’t scrimp too much on critical expenditure which drives sales, For example marketing or sales person commission.