9 steps to small business budgeting
For every business, there is a lot of things management needs to be on top of, like marketing, sales, building a new website and establishing a digital presence. But the most important element in the business is the budget. To have a thriving and sustainable business, a detailed and accurate budget is mandatory.
What is a budget?
A budget is basically a financial plan for the future concerning the revenues and costs of a business, it is an estimated income and expenses for a given period in future. Budgeting is the process by which financial control is exercised within a business. The income and expenses are prepared in advance and then compared to the actual performance to establish any variances. Managers are responsible for the controllable cost within their budgets and are required to take remedial action if adverse variances arise and they are considered excessive. So, in simple terms, it is the plan to spend less than you make each month.
Why it is important?
Actual and anticipated expenses to income are important because it helps small businesses to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Budgeting is curcial for:
- Financial Decisions: The budget can also be described as a road map to your business. The current business finances can be analyzed and evaluated. Based on the budget, a business can work on its financial goal in the future.
- Identify to reduce the expenses and increase the revenue: Budget will help you identify the areas to reduce the spending or increase the revenue and this evaluation will increase the profitability in the process. The managers can understand how conditions may change and what steps they need to take when problems arise.
- Funds to expand the business: To avail yourself of a business loan or funds from investors, a detailed budget with income and expenses is required.
Budgeting is not just for people who do not have enough money. It is for everyone who wants to ensure that their money is enough ― Rosette Mugidde Wamambe
Steps in preparing a small business budget
Every business has a different process, situation, or way of budgeting. An employer needs to choose the timeframe of the budget – monthly, quarterly, or yearly – depending on the needs of the business. There are some basic parameters that the management needs to consider while budgeting.
- Spread Sheets: To start any business the first step is to prepare a spreadsheet with an estimate of the total dollar amount and percentage of the revenue that needs to be allocated towards raw materials and other costs. Before adding the figures to the spreadsheet, it will be a good idea to contact a supplier of the business that has to work with and it applies for expenses like rent, taxes, insurance etc. It is important for the business to understand the different types of budgets.
- Checking Industry Benchmarking: Businesses are not alike, but there are some similarities, thus it is very important to do some research and peruse the internet for information about the industry. Small businesses can make a study on the way larger companies operate like- marketing and sales strategies, organizational structure, payroll process, services to the customer etc. In doing so, the small business can discover certain steps they can take to cut costs and save money.
Instead of just guessing the key number, the business can investigate the industry standards beforehand and then prepare the budget together.
Compared to larger companies’ small businesses can be extremely unpredictable as they are more susceptible to industry downturns, and they have more diversified competitors. So, while preparing the budget small businesses only need to look into an average and not the specific.
- Review Previous Period: While preparing a budget you need to always investigate the existing information that is in hand. The best is it should be a continuation of your previous one. In this step, management needs to consult other team leaders (if any) and then based on feedback the best collaborative budget should be prepared. The starting point for any budgeting will be to figure out how much the spending is and this will involve other costs.
For start-ups that aren’t yet profitable, they will be spending from the investor capital or venture debt. So, at this stage, the start-ups need to identify the “burn rate” that the business is comfortable investing in for each period.
- Fixed Cost: The business needs to set up their fixed costs, this term is often called overheads and normally this has very little control off, most importantly they will not impact the sales whether the business succeeds or not won’t have any effect on the amount you pay. Fixed costs can include rent or mortgage for office space, employee wages, insurance, interest and loans, website/server hosting etc.
- Variable Costs: Budget will also have the variable cost; these are usually thought of as an optional expenses exactly opposite to fixed costs they are more fluid. Some of the variable costs are marketing & advertising, cooperate investment and donations, software subscriptions, travel and client meeting, bonus and other perks, office décor and renovation.
While preparing the budget these costs must justify more critically and if the business is going over budget, then variable costs are usually the first to be cut.
- Forecast additional cost: A business needs to set out the irregular expenses separately in the budget. Some portion of your budget needs to be set aside in case unexpected events occur and the business always needs a safety net.
- Income: Every employer needs to understand the expected business income for the budget period. A comparative study can be done by looking into the previous income and can get an idea of what income to expect, it is better if the expected income has some flexibility in case the situation changes.
- Cashflow Study: A business should have a clear record of expected revenue and expenses; this is where the analysis of the budget starts. Cash flow refers to the money coming in and going out of the business. Look for clear alerts and notifications that certain parts of the budget might need extra attention. Managers need to know the aspects of the business that impact the budget most heavily and need to be flexible enough to adjust accordingly.
- Communication with the Team Leaders/Managers: Another important step is to share the budget with Team Leaders, Managers and the senior management team.
In absence of a budget, a company runs the risk of spending money it doesn’t have, not expanding to compete or failing to build solid emergency funds.
Budget preparation is an easy process, but the important process is how to utilize the budget to the fullest to match the current and future revenue to expenses. The budget goal is to make business decisions like is there enough money available to keep the business up and running, to expand the business to compete, looks way to cost cut, and to ensure there are extra funds available in case of emergencies. Review your budget periodically (monthly, quarterly, half-yearly, yearly) and shop around for new suppliers to save money on products or services for your business.
*NETCorp is not an accounting firm, HR specialist, or financial advisors and therefore we encourage you to do your on fact finding research