A Guest Post by Doug Walker
Budget is essential when it comes to guiding a business. Making a budget helps you plan what you want to do in the foreseeable future and express it in expenses and revenue within an action plan.
Most small businesses fail because they:
- Don’t plan their budget far enough ahead.
- Spend too much money on unnecessary things.
- Avoid regular budget reviews.
Often, small businesses consider planning and creating a budget for their business a waste of time and don’t take it seriously. As a result, many face serious problems that can put their business in danger.
Here is the ultimate guide on how to plan the ideal budget for your small business.
STRATEGY & GOALS
Before you start creating your budget, you need to know your business. You must conduct a thorough analysis of your business and the specific market you want to tap into. Everything from what you’ll invest in, to what your sales methodologies will be, to what you have stocked in the shared kitchen. Don’t skimp on this.
Set multiple financial goals for your business but make sure they are measurable and realistic because they could further motivate you in the long run. Create accurate calculations based on your previous studies and market characteristics to avoid making any assumptions. Use data to your advantage.
Take the time to carefully make your strategy and think about the points and areas you want to focus on. Remember, it’s crucial to be realistic. Obviously, every self-employed professional or entrepreneur dreams of building an empire in a short time, but typically that isn’t reality. If you’ve just started your online eCommerce store selling hiking backpacks or vape juice and have seen promising results, don’t take your foot off the gas. Budget, plan, and try to envision how you’ll take this business further. It takes time and good planning to grow your business.
A good tip before making a budget for your small business is to create a forecast of your next year’s income to the best of your ability. By doing so, you can start planning your budget more realistically because you will know how much you can and want to spend. Make sure that you consider all data before getting started so your forecast can be as accurate as possible, then tweak and adjust it minimally when the time comes.
Keep in mind that this is crucial because you will make a series of decisions in different areas that can determine the future of your business in terms of income.
BUDGET FOR FIXED & VARIABLE COSTS
Your budget is there to keep you out of debt. When making your budget, allocate funds for your fixed and variable costs.
- Fixed costs are those that you will have to bear throughout the year, regardless of your turnover or any other factor. These include renting of installations and equipment, costs of internet, telephone, electricity, heating, and wages.
- Variable costs vary over a period depending on factors such as production costs, transport, raw materials and allowances.
Your budget can be annual, semi-annual, or quarterly, depending on the type of business you run. However, regardless of how you want to make your budget, it must be detailed every month to control your expenses efficiently. In short, the idea behind this is to prioritize and evaluate the effects generated by the company.
FORECAST CASH FLOW
This plan is the most efficient use of your business’s cash and seeks to maintain balances close to the money needs that the company requires to operate properly. Using the vaping products start-up example from earlier, understanding customer value management would be imperative to have an accurate cash flow forecast. Do you know the customer lifetime value (LTV) of your customers? How often do they purchase more vape juice and inject money into the business? Monthly or weekly? This is just one thing that needs to be considered when creating a small business budget.
Having a good understanding of your business’s cash flow will also prevent several obligations from being breached, such as payments toward suppliers, creditors, or staff.
If your numbers are positive, it means that the business has enough financing to continue operating. On the other hand, if it’s negative, additional funding is needed. You can get financing for your company through investors or getting a bank loan, but you need to put it all in your budget so you can know if it’s enough. Remember, careful planning is the key.
Once you’ve created your budget, your work has just begun. You have to monitor it periodically to make sure everything is going according to the initial plan. To review it, you have to look at your current situation: what are the estimated income and expenditures, and therefore is your business market-worthy?
If there is an area where too much money is being spent, this must be reduced or eliminated. By doing this, your costs and expenses are matched, and you arrive at a budget balance. However, it is essential to remember that the budget is not an unalterable tool — it can and must be modified during its term. So you have to conduct frequent reviews and make the necessary adjustments. Consider using machine learning services that can sort through large quantities of data to help you track and adjust your in/outgoings in real-time.
BUDGET FOR ALL AREAS
Planning a budget for all areas is an integral part of making a small business budget. Therefore, each operational business area must have its own budget. In other words, plan and prepare a budget for the whole company at first, and later divide the budget among each area individually. By designing a budget for each operational area of your business, it will be easier to monitor, follow up, and collaborate with compliance with the general budget. This way, you’ll minimize the chances of unexpected expenses and save money for future goals and investments. For example, you can provide a company credit card for employees that have a spending limit. This way, you’ll prevent them from overspending.
THINK BIG PICTURE & LONG TERM
Creating a budget for your small business is absolutely necessary. It can get a little daunting, particularly with all the little components that make up a budget but don’t get frightened off.
This will be what makes or breaks your small business. It helps to think big picture and think long term. Do you need this item? Is it important to your business success? If yes, include it in the budget — and see if you can get it second-hand or rent it. Tracking small expenses can also help you see how they add up in the long run and help you eliminate unnecessary costs. Remember, budgets are for those looking ahead.