Going into business is an exciting time. Business owners are filled with optimism and determination to see their operation succeed. However, without an adequate business budget, the best laid plans are doomed to fail.
A budget is an action plan for your business – outlining your organization’s financial and operational goals. The budget acts as a guide for allocating resources, formulating future plans, and evaluating performance.
Simply put, a budget gives you the whole story behind your business’ performance. It’s easy to get caught up in growing sales figures but there’s so much more to consider, including expenses and potential problems. A good budget acts as a platform from which you can objectively review your business performance, highlight problem areas that need attention, as well as properly plan for the future.
When setting up your budget it’s important to think about key items to include as well as best practices. We’ll take a closer look at that here:
As a small business owner you want your budget to do two main things – eliminate wasteful spending and increase the rate of profits. A good budget for a small business must accomplish the following:
Estimations can only take you so far in business. A budget eliminates the guessing game by giving you more control over finances, with accurate data of what’s coming in and what’s going out. Taking the time to get real figures will pay off in the long run.
One of the best things about a budget is its adaptability. Nothing is set in stone, and as your business grows and its needs changes, so too can you adjust your figures to reflect how those changes impact your profit. Agility is a key element to scaling small businesses, and therefore budgets should always allow for it.
So you’re ready to go with your brand new budget! But which figures are important? Fortunately in small business, you don’t have to consider everything. Below we’ve listed the groups of figures that tell the story of your business finances:
To avoid accidentally overlooking business costs, consider things like:
Anticipating expenses, predicting future business growth… these projections can be quite tricky at the best of times. But take a breath. Financial projection in its simplest form is just a forecast of future revenues and expenses.
The most important thing to remember is to be realistic with your figures – avoid over- or underestimating your business revenue. Make use of online resources, learning from those who’ve successfully created projections. It’s also a good idea to have a trusted friend/business partner look over your projections as well.
With that in mind, we’ve outlined the steps that will help you set up your business budget:
Setting up a good budget begins with determining the amount of money earned on a monthly basis.
Your fixed costs are expenses charged at the same price every month. Incorporating these is by far the simplest part of setting up your budget.
Contrary to fixed costs, monthly variable expenses don’t have a fixed price tag. These purchases may be scaled up or down depending on how well your business is doing. For instance, if your business does better than you forecasted, you can use the extra profit to increase variable expenses which help your business grow faster.
Remember your monthly profit will be the earnings you have left after paying all product costs. For a quick overview of the finances available to manage your business, look at your Gross Profit Margin . Your GPM includes your profit and tells you what you can use to cover overheads and growth.
Working within a budget makes one-time purchases so much easier to factor. This is true for planned as well as unexpected costs. You’ll have the freedom to budget in advance for that business retreat you’ve always wanted, but also be able to purchase a new laptop to replace one that crashed without warning.
The 4 steps above make up the elements of a good business budget. Your final step is to bring it all together in a format that’s easy to understand.
With your current financial data in black and white, you are now able to create a forecasting budget. This will tell you how much:
A system like Okumm is the perfect tool to help you determine an accurate budget based on your revenue target, resources spent, and overheads.
A budget isn’t a static thing – it evolves along with your business. You’ll need to constantly make adjustments according to shifts in growth and profit. It’s a good idea to revisit your budget every three months to assess your finances and determine whether any changes need to be made. This gives you greater control over the financial future of your business, while also allowing you to make provision for unexpected costs.
Predicting when a project will go over budget is difficult to do. For this reason, always budget slightly above anticipated costs to ensure you’ll be prepared for any unexpected expenses that might crop up. By overestimating costs you will shield your business against the often disastrous effects of unanticipated expenses.
There’s a degree of risk involved in every business venture. It’s therefore important for small business owners to consider their long- and short-term risks. Ask key questions – How will changes in minimum wage affect the workforce? Is my business location in a high risk area for natural disasters? How does my selling price [link: price article] impact my company’s bottom line?
Defining and understanding potential risks allows you to map out all the threats to your business, and you can then move forward with whatever emergency planning, insurance, etc. you may need.
Although it may be tempting to save as much earnings as possible, a good budget should have enough room for you to be paid appropriately. Often owners have guilt about drawing a paycheck, but an owner is also an employee and you should be compensated as such.
By involving your staff in the budget process, you invite their ideas and any insights they might have. There are so many moving parts to an accurate budget, with a lot of pressure to be placed on just one person. A coordinated budget team will provide several different perspectives and result in a budget that accounts for every eventuality. Doing things this way will also guarantee everyone is aware of the company’s goals, and have them working toward that same end.
A cash flow forecast or financial projection is a forecast of what your company’s revenues and expenses will be in the future.
Let’s take a look at the main reasons why a cash flow forecast is so important:
In the corporate finance context: cash flow forecasting is modeling a company’s future financial liquidity over a certain time period.
In the entrepreneurial/small and medium business context: cash flow forecasting is planning what cash will come into the business to sufficiently manage the product/service going out. This planning helps to avoid exceeding the cash flow coming in. To find the ‘tipping point’ in your revenue target to increase chances of liquid cash flow, you have to look at your break even analysis.
Managing your cash flow effectively will help you anticipate and thereby prepare for future highs and lows that your business might face. It also gives you a clear picture of whether your business is under- or over-performing by comparing actual income and expenses with forecasted figures. If you are seeking funding, these forecasts are vital when approaching prospective investors, banks, or business partners. It can thus be seen why a cash flow forecast is so important to your business, and how it serves to prevent profitable companies from running out of cash.
A budget is critical to the success of a business. However, not all small business owners are adept at drawing up budgets, or have the resources to hire people who are. That is where Okumm comes in.
Creating a business model on Okumm can help determine your break even point and budget to ensure your business performs as well as it should.
With Okumm you can: