Many small businesses operate from month to month, hoping that the money they bring in will cover the payments they must make and that they will have some profits to bank at the end of the year. But taking some time to plan and budget properly can take your enterprise to the next level, no matter how small it is. With a budget in place, you will not only reduce your risk of spending more than you make, but also find opportunities to make your business more profitable.
What’s more, creating a budget is relatively simple even if you don’t know much about accounting. You can use a simple spreadsheet – there are many great budget templates available such as Excel for example – or a cloud-based accounting solution to easily capture your expenses and income. Your accountant will be able to help you, but you’ll also be able to do a lot of the work yourself.
1. Don’t overlook the components of a good budget
To draw up a helpful budget for your small business, you should be sure to take account of all of your business’s income sources as well as its costs. The budget should help you to forecast revenues and expenditure, so that you can make better business decisions and track how your business is doing at all times. Be sure to record all of these numbers:
- Revenue: This is how much money you expect to make from the sale of goods and services for the year or quarter. Also include interest you earn on money in the bank. You can base your expectations on the previous year’s numbers, adjusting for inflation, price increases you’ve imposed and your average annual growth rate for previous years.
- Fixed costs: This is all the regular, predictable expenses your business faces, for example, rent, electricity, wages and salaries, loan repayments, leasing of equipment, Internet and web hosting services, and accounting fees.
- Variable costs: Here, you should consider costs that may vary according to your sales, the time of the year, and other factors. This might include travel costs, raw materials, inventory, production costs, packaging, shipping, ad hoc contractors and sales commissions.
- Once-off costs: This will usually include capital investments and startup costs – equipment, furniture, software, vehicles and so on.
- Cash flow: Look at the monthly or annual flow of money in and out of your business – it’s as simple as subtracting your expenses from the funds that are paid into your bank account. Are your customers paying you on time, or are you resorting to an overdraft to cover the gap between delivery and payment? Are you spending less or more money than the business brings in?
- Profit before and after tax: Your profit before tax is how much money is left after you have paid every single expense for month, quarter or year. Are you making as much money as you hoped to? Is there room to generate more revenue or reduce costs to improve profit? Don’t forget to budget for your annual tax bill!
2. Experiment with different scenarios
Capturing the numbers will help you to understand and forecast how your business will perform in the months, quarters and years to come. This is just a starting point, you should play around with your numbers to see if there are ways to reduce expenses or increase your income. For example, you can start to look at questions such as:
- What happens if I increase my prices by 10%?
- What will the impact be if I move into premises that cost 7% less to rent each month?
- How much will my variable costs rise if sales increase by 20%?
- Can I afford to hire another junior technician at R30,000 a month?
3. Be aware of industry-specific costs and opportunities
Not all industries are the same, so take the time to benchmark your costs and revenues against other companies in your sector. You should also be sure to account for some of the quirks in your business model and industry when you interpret the numbers in your accounting system spreadsheets. For example:
- If you have an ecommerce business, look carefully at delivery costs. Can you afford to offer flat-rate or free delivery, given how volatile the fuel price is? What is the potential impact of offering free shipping? How would a lower or higher fuel price affect your numbers throughout a year? If you’re not in ecommerce yet, you could explore how much it costs to getting going with a solution like GoDaddy Website Builder.
- If you are running a consulting services business, you are probably selling hours of work. How much would you need to bill your time out for, if you wish to subcontract some of the work you get to someone else and still make a profit?
- As a restaurant in a holiday town on the seaside, your business will be highly seasonal and you will face a careful balancing act between taking advantage of peak demand and keeping costs under control for the quieter periods of the year. For example, how much money would you need to generate in the December peak season to justify the costs of the large, sea-facing premises you have rented?
- If you run a retail business, it might seem obvious that you need to include the cost of the stock you purchase for resell in your budget. But don’t forget about expenses such as warehousing, shipping and customer support in your budgeting. For example, you might benefit from better pricing if you buy the widgets you sell in larger quantities, but you may need to rent a larger storage room to do so. Or, if you sell, perishable goods, you should be realistic about the costs of not selling stock before it reaches its best-before date.
4. Err on the side of caution
Economic conditions are difficult and no business owner can be sure of what waits around the corner. Be conservative in your budgeting and leave a bit of a buffer in case your input costs rise sharply, you lose a key customer, or you face an unexpected once-off cost such as the replacement of an expensive piece of equipment. If you leave a bit of slack in your cash flow and profit and loss forecast, you will be better positioned to manage unexpected risks and challenges. If you can, build an emergency fund to cover unexpected expenses.
Budgeting is a process, not an event
Once you have a budget in place, you have a powerful tool to track the performance of your business. But remember that budgeting should not be an exercise you perform once a year – it should be about constantly measuring how your business is doing, fixing your assumptions where they prove to be wrong, and adjusting course in response to your actual cash flow, sales performance and expenditure.