Does your small business do budgets? We know that you’re busy but you should definitely make some time to budget. Budgets, after all, are an estimate of income and expenditure for a set period of time. They’re an approximation of how your business is going to perform.
Reasons to Budget
Budgeting helps you to forecast your cash flow, the importance of which we have already covered in our cash flow guide. Let’s just say it helps you to make sure you’re business has enough cash to keep it running. You’ll be able to see if upcoming expenses are covered by the cash you already have plus what you expect to receive from sales.
Doing the budget will also inform you whether or not your business can afford to make certain large scale purchases. Perhaps you’re thinking of getting a new company van to expand your operations but your budget tells you that waiting another month will be better for the overall financial health of your company.
If you are expecting a period of growth your budget can give you a handle on what sales revenue you can expect as well as any increased operating costs.
Benefits to Budgeting
The main benefit of budgeting is that it can help you avoid problems by making you aware of them before they occur, especially in terms of cash flow. It’s better to find out that you might struggle to pay bills three months before they’re due then when they are actually due. This gives you time to act and deal with the situation before any harm comes to your operation.
Timeline planning is another major benefit of budgeting. The cash your business has is a finite resource, unfortunately. That means you can’t do everything at once and a budget will help you see what activities you can carry out at what times depending on how much they cost. If you’re a marketer your budget may decide at what points during the year different campaigns will be run whereas a software’s development roadmap will be influenced by how much of a budget the development team is granted.
You might not think that setting time aside to do the budget is glamorous. You will probably agree though that it is important, and if it’s important let’s try and do it the best that we can. Here are some simple tips to improve your budgeting and the information you are getting from it:
Set a certain period of time to do your budget for (say 3 months) before you come back and budget again for the next period of time. Keeping time periods shorter will allow your budget to be more accurate, things change in business on a daily basis after all.
Profit & Cash Flow Targets
When preparing your budget, you should be doing so with both profit and cash flow in mind. They are not the same thing but as they are both important for your business, setting up your budget so that you will have visibility of both of these is vitally important.
Make Two Expense Lists
There are two types of expenses, necessary and discretionary. The rent that your business pays might be a monthly expense and it is necessary, unless you plan on running your business without a premises. If you’re trying to keep your outgoings down, put your necessary business expenses into your budget first and see where your totals stand. Then you can review discretionary expenses and come to a feasible conclusion of your financial planning.
Remember when we said that things change on a daily basis, this is what making trade offs is all about. Maybe you’ll manage to get something for free by winning a competition that you didn’t expect. On the other hand, you might have to pay more than you budgeted for an essential service that you can’t do without.
Whenever a major amount of extra money is made available to or taken away from your budget it’s time to review it and see what you could do with more of or what will need to be cut.
Budgeting is a central plank of managing your cash flow, arguably the most critical part of managing a business. Make sure to check out our guide on cash flow if you want to know more.