Do You Know Your Numbers?

So, how many small business owners think about developing an accurate budget?  We all know that we need to spend money to make money and we want to save as much money on those expenses whenever possible.  But do you know how much you actually have available to spend in the first place? 

Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business as well as generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in or, conversely, not spending enough money to grow the business and compete.

The budgeting process is a key part of running a business successfully. It provides an opportunity for management to thoroughly review progress and to set objectives.  The budget is also a living document which needs to be continuously reviewed in light of the business environment and actual performance. In addition, formal reviews should be done on a quarterly basis. This gives business owners a chance to see what’s really going on their business.   

Benefits of a business budget

There are a number of benefits of drawing up a business budget, including being better able to:

·         manage your money effectively

·         allocate appropriate resources to projects

·         monitor performance

·         meet your objectives

·         improve decision-making

·         identify problems before they occur - such as the need to raise finance or cashflow     difficulties

·         plan for the future

·         increase staff motivation

Okay.  So, now you know why it’s so important to have a budget, but do you know where to start when making one that works?

Creating a budget

Creating, monitoring and managing a budget is key to business success. It helps you allocate resources where they are needed, and it does not to be complicated. You simply need to work out what you are likely to earn and spend in the budget period.  The key here is determine a budget for each item that you need to spend money on; marketing, inventory, payroll, rent and utilities, office expenses.  Everything. 

Start preparing your budget two to three months before the start of a new financial year.

Begin by asking these questions:

1.                   What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.

2.                   What are the direct costs of sales - ie costs of materials, components or subcontractors to make the product or supply the service?

3.                   What are the fixed costs or overheads? Break down the fixed costs and overheads (the costs that are beyond your control) by type, for example:

•             cost rent or mortgage

•             payroll costs - pay, benefits, etc.

•             utilities - heating, lighting, telephone, internet, etc.

•             vehicle expenses

•             equipment costs  

•             legal and professional costs, including insurance

Your business may have different types of fixed expenses, and you may need to sub-divide these into smaller categories. Don’t forget to work in a salary for yourself.  I this happen all the time, where business owner sink so much money into the business that they don’t bother paying themselves. 

Now you need to figure out your variable expenses, the things you can control.  Things like marketing, travel costs, office expenses, etc.  Decide how much you want to be able to spend on these things throughout the year, based on the funds available.  Once you have figures for income and expenditure, you can work out how much money you're making. You can look at your costs and work out ways to reduce them. You should also be able to spot if you are likely to have cashflow problems - giving you time to do something about them. 

It’s going to take some time to play with your numbers to make everything balance.   That is ultimately the goal… to make sure you’re not in the red.  But taking the time to really dig into your business’ finances is a measure of control all business owners need to have.  Stick to your budget as closely as possible, but review and revise it as needed. Remember it’s a plan, a guide to your business finances.  It’s not set in stone, but constant review of it is essential to make sure you know where your business stands.