WHY YOU SHOULD
One of the greatest causes of stress for an entrepreneur is the sense of being out of control. Most small business owners are so busy ‘doing’ (selling, ordering, making, delivering, stocking etc.) that they forget to take the time to think, plan and take control of the money.
Having a budget that is well researched and practical will help you to manage your finances judiciously by making informed decisions about where, how and why you spend your money. Just as you cannot sell without paying attention to your customers, you cannot achieve a profit without paying careful attention to the numbers. Many a business has gone under during their busiest months, because the owner lost track of spiralling expenses.
Budgets allow you to control costs, avoid unnecessary & expensive debt and keep you on track to achieving the business goals.
Do think of a budget as an important tool and the time spent developing and updating it as an investment in the business.
Do set financial goals for your business and prioritise them. Resources are always limited, so what will have the greatest and quickest impact on your bottom line or future growth?
Do your homework. A budget is a view of the future, but without reliable and fairly accurate numbers, it could simply be a pipe dream. Look back at historical expenses as a means of predicting what to expect. If you are a brand new business, Google is your new best friend because you will need to research the cost of everything from office rentals to petrol to raw materials.
Do research your market thoroughly… what is the size, demand and potential spend, plus how much competition is there? Money in (revenue), minus money out (expenses) leaves either a profit or a loss. A budget is meaningless without a realistic sales revenue estimate.
Do limit your budget projections to a couple of months ahead until you feel confident that your numbers are reliable. Thereafter, 12 month projections are preferable… especially from an investor’s point of view.
Do involve your senior people in compiling the budget (if you have a team) because most people do not understand the true cost of running a business.
Do err on the side of conservative revenue estimates and exaggerated expenses. A sales target of R1 million is hardly feasible for a start-up sandwich business in a small town. Rather have a pleasant surprise at the end of the month!
Do be prepared to adjust your budget as you acquire new information… e.g. the Budget Speech, a new pandemic, a sudden increase in the oil price.
Don’t be an ostrich and ignore the experts or the news... If there is rising inflation and unemployment, or crime is sky rocketing in your area, this will have an impact on your business.
Don’t think a budget is a one-off event. It needs to be updated and adjusted every month at least. E.g. If you regularly overspend in the same category, then clearly your numbers were incorrect to begin with or there is potential wastage.
Don’t lose sight of fixed costs. Employee salaries and overheads such as the rent have to be paid every month, regardless of how much money your business did/did not make.
Don’t forget to include the taxman and other statutory costs in your budget.
Don’t forget to save during the good months in order to tide the business over during the lean months. This is especially important for seasonal businesses, but every entrepreneur can bank on the proverbial rainy day happening at some point.
Don’t assume that all customers will pay the full amount and on time. Late payments or bad debt can cripple a small business. Unless the money is in your bank and it has been cleared, it hasn’t actually been received.
Don’t forget that a predicted increase in sales, will usually mean an increase in raw materials and expenses (variable costs), these need to be factored into your budget.
Overall, a budget puts you back in control of the money and therefore the business. It allows for strategic planning and allocation of resources. Most importantly, it makes you more resilient to change.