Basic Business Budgeting

GetPrimaryImage2.jpeg

“Alice: Would you tell me, please, which way I ought to go from here?The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.” 

(Lewis CarrollAlice in Wonderland)

Business owners would do well to heed the wise words of the Cheshire Cat. In the haste and busyness of starting or running a business, it is very easy to pay lip service to budget but unless you want to end up “somewhere” as opposed to where you envision your business, this is a vital roadmap. Simply put, a budget is a bird’s eye view of money into and out of the business. It is the most effective way of managing cash flow effectively while planning for future expenses and growth.

There is a plethora of budgeting software available, however, even a simple Excel spreadsheet is sufficient. The advantage of having a budget is that control is placed in the hands of the business owner, rather than being a victim of fate. It provides solid information on performance (month on month, quarterly, year on year); costs and where streamlining is possible; profitability of certain lines or projects; and data on which to base decisions regarding possible growth opportunities.  Without such information, a business owner is literally operating in the dark.

The starting point for creating a budget is always projected income. Where the business has been running for some time, historical data assists with projecting sales, but if this is a new business, such information has to be gleaned from considering similar businesses in the area and customer research. Income is derived from sales, investments, loans, and savings. When projecting sales it is preferable to be conservative. It is important to consider seasonal cycles, the macro and micro-economic environment (e.g. the investment climate or local industry closures) and internal constraints, such as limited space or machinery output capability.

Once income has been estimated for the budget period (traditionally, a twelve-month budget should be developed which then informs quarterly or monthly budgets and vice versa.) then it is necessary to look at the costs. Expenditure should be separated into fixed costs (costs that will not vary regardless of the performance of the business, e.g. rental, utilities, vehicle expenses, salaries); variable costs, (linked to predicted sales volumes, e.g. raw materials, overtime, advertising or telephony bills which will rise with increased sales calls) and once-off capital costs (computer equipment, premises, furniture).

Logically, if you are planning a large sales and marketing campaign for June, then variable expenses will be higher for that month, while revenue ought to increase for the subsequent month/s. This kind of detail may seem torturous the first time around, but the payoff is good financial control and planning which then forms the template for future budgets. Depending on the nature and size of the business, the budget may need to be divided per department or per project and these “mini-budgets” feed into the overall operating budget.

Once the income and expenditure have been broken down, it is easy to see whether or not, where and when the business is profitable. The owner can predict when cash flow will be a problem and seek finance with solid figures to support the application. It allows for careful staff planning and the concomitant increase in salaries and furniture or equipment. Most importantly, the business owner is able to evaluate the key business drivers and to troubleshoot possible problems before they become serious.

 

It is essential that once a budget has been created it remains a “live” document. It is only through constant re-visiting, tweaking and measuring of actual vs budgeted performance that a business owner can be adequately equipped to make sound business decisions.

Key take out: A budget is a roadmap that ensures that you reach your business goals, in the most cost-effective and stress-free manner possible. It provides sound financial information to make sound business decisions.

Author: Janet Askew

 

 

Was this article helpful?
0 out of 0 found this helpful
Return to top
12 comments
    I am intimated by budgeting because Im not particularly a finance person. I know how much I am paying in office rent and basic overheads but other than that... Its still a big scary world for me. How do I grow comfortable with managing my finances even though I am not a finance person?
    Sorry meant intimidated!
    I feel the same way about budgeting Khanyi it is quite scary to tackle especially if you have never done it before! I found this on the entrepreneur website that helped mehttps://www.entrepreneur.com/article/201670
    @TastyChef thank you for the link It will certainly go a long way in assisting me. What Im thinking about as well what is the role of a financial manager in the business and a business accountant? Is one more operational and the other for compliance for tax/auditing purposes?
    As far as I know a finance manager oversees financial decisions for a department or company. They will usually be involved in Financial Planning and Analysis.
    Where the finance manager above will be responsible for predicting thefuture the bussiness accountant responsible for the accounting department reviewspastspend to present creating an accurate picture of past performance and tax planning.
    Something I would like to know is how much of my budget to put aside as a safety net? I'm always tempted to use any leftover cash to up loan or car payments to clear them quicker anyone have advice on that?
    Thanks! Got it. Which then means until a company has grown to the level of needing a finance manager the entreprenuer should actually have a good handle on managing finances of the business.
    I keep an operational amount of money in my transactional account and the rest I keep in a interest bearing savings account that allows me to move money in an out of it as I need to. When you talk about car payments/loans are these business vehicles loans or personal?
    I battled with this for years - most of the software we tried to use was either too cumbersome or too lightweight. Eventually we built our own solution which Nedbank has made available to their clients free of charge -https://www.nedbank.co.za/content/nedbank/desktop/gt/en/business/transacting/value-added-services/small-business-money-manager.html. This has won several awards for innovation from the likes of Microsoft and I truly believe this software can help individuals and small businesses to manage their finances. We've worked really hard to strike the balance between being easy to use(budgeting software should make your life easier not harder) while still being very powerful (it should also add significant value and insights). I really believe that having the right tool for the job is of utmost importance.
    Well Done Gary I will check out the link you've sent.
    Just another thougth on this... I've subscribed to a number of channels on Flipboard (app) that post articles and tips on budgeting. Another good source of input and a great way to learn something valuable when you have 5 minutes on your phone between meetings :).