Your Business Budget: Healthy or Harmful?September 11th, 2015
Is your business budget realistic, or have you set yourself up for failure?
Even before your business is up and running, it’s essential to have a financial plan in place. It’s easy to become engulfed by all the other routine essentials, but never underestimate the importance of a good budget and sticking to it.
Each business owner will have slightly different processes and will be in a different situation, so every business budget will be different. However there are some key elements that most will need to factor in such as rent, utilities and payroll. Also, depending on the size of your business, it may be necessary to split your budget up into different areas such as marketing, sales, production etc. If you do have to split the budget, having an up-to-date understanding of the costs of the business is even more imperative.
Main benefits of budgeting
There are several benefits, besides the financial peace of mind, associated with good budgeting, including: a greater understanding of your financial state, the ability to focus on other things without having to constantly worry about your expenditure, and the ability to continually develop and improve your business.
Other benefits include:
- The ability to manage and understand your cash flow.
- Understanding a department’s needs and allocating the appropriate amount to different departments.
- Monitoring performance.
- Identifying problems before they occur. If you have a budget and stick to it, you’ll be able to recognise when you need to raise money for certain expenditure, especially when it is unexpected.
- Planning for the future – having a budget means you’ll understand exactly how much you can afford to spend on certain things throughout the year. It will also help you to understand whether you can afford to spend more money throughout the year on things like expansion or more stock.
- Securing financing. If you’re ever in need of financing, banks and lenders will want to see your budget before they commit.
Tips to creating a healthy budget
Ensuring you have a healthy budget is about planning, implementing, and committing to the figures on the page. It’s also about continually reviewing your budget and updating it if and when needed.
- Decide your financial goals
It’s pointless to create a budget if you don’t know what your end goal is. Do you want to pay off a debt? Do you want to stay on top of your finances? Are you saving for renovations?
A budget is there to ensure you stay on track with any financial goals and to make sure your business is financially healthy.
- Make time for budgeting
When establishing your budget, it’s imperative that you set aside enough time to adequately create one. It will be easier to manage if you do it properly, and in a format that is easy to understand and change, and ultimately it will be more effective. Remember to also set aside enough time throughout the year to review it.
Circumstances will not always remain the same, so it’s important to continually go back to your budget and update it if need be.
- Use previous figures as a guide
Do you know how much money you need for marketing off the top of your head? Probably not, so it’s important to enter last year’s figures.
Make a list of all major expenses throughout the year, including any money you set aside for all operational costs of your business and all the incidentals.
But remember, these are just a guide. Hopefully you’ll grow in your business, and you’ll need to adapt your budget to reflect this.
- Do your research
If you’re just setting up your business and you don’t have any previous figures to work with, it’s best to look at typical costs facing a business in your area – both geographically and in your business sector. While not all business areas are alike, there are some industry standards that you can use and adapt to your personal circumstances.
This is also important when you’re reviewing your budget. Speak to local like-business owners in your area to find out what their big costs have been. If you think you may run into that expense, factor it into your budget.
- Be realistic and cut yourself some slack
There will always be some incorrect figures when creating and reviewing your budget, so remember to cut yourself some slack. A budget is an estimate and no matter how hard you try to stick to it, things don’t always go to plan.
Factor in some wiggle room in all figures so that if something does crop up, you’re financially capable of dealing with it. Just make sure any extra expenses or underperformance can be justified.
- Revisit and review
A budget is not something that you create and then file away in a drawer for next time. It needs to be constantly revisited, reviewed and reworked.
Record your actual expenditure and income, and then compare it to your forecast in your budget at regular increments.
Ensure it’s healthy and accurate
At the end of the day, a budget is a guide for you to understand the financial elements of your business and keep track of any spending. Ultimately, it’s up to you to stick to it, review it, and update it regularly to ensure your business runs effectively, and has potential to grow and compete.
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