Owning a small business is not easy; having a good plan is a key requirement for success. Alongside your business plan, a well thought-through budget is a powerful tool.
A well-considered budget helps when making important decisions, and provides a baseline for determining whether a business is achieving its goals and objectives by providing a set of metrics to measure performance during the year. A budget helps businesses control expenses, manage inventory and cash flow, make key investment decisions, secure funding and attract investors / new partners.
Despite the important role a budget plays many SMEs don’t invest the time and effort to create and implement one. Some of the reasons business owners typically give for not having one include: “I don’t know how to”, “I don’t think it is a good use of my time”, “My business isn’t big enough” and “There’s no need – all the information is in my head.”
Here are 5 tips to help you put a budget in place:
1. Start with a Sales Forecast
Estimate what your business’s sales will look like this year. You may find it helpful to do this by market, customer or product, or a combination of all three! A sales forecast is a foundation of your budget and your business plan.
2. Estimate your Cost of Sales
Now look at your cost of sales, i.e the costs directly related to making a sale, and calculate your likely gross profit and gross profit margin. Gross profit is the difference between sales and the direct costs associated with sales and funds the business.
3. Calculate Overheads and Expenses
Start by looking at your accounts from last year. These will give you an understanding of your overheads and base expenses. Unless you have made specific changes (e.g. hired new people, moved premises) these are likely to be similar.
4. Keep it Simple
A budget doesn’t need to be complex; a set of monthly expectations of where you would like to be financially. It should contain the key areas of income and expenditure as they relate to your business.
Compare your budget to the equivalent period from last year’s figures and you now have the starting point for regularly monthly reviews, complete with metrics, to measure your progress! As the year progresses, compare actual results with your budget and last year’s performance to give you a real time picture of how things are going!
A working budget is one of a crucial set of tools in ensuring the success of your business. As Benjamin Franklin said:
“By failing to prepare, you are preparing to fail.”