SMALL BUSINESS BUDGETING – WHY IS IT IMPORTANT AND TIPS TO CREATING ONE
A budget is an estimate of business income and expenditure over a defined period of time, typically one year. It’s most effective when linked to business goals and plans.
You can set budgets for a variety of different areas of your business such as sales, marketing, cash, operating budgets.
Here’s my simple breakdown of why budgeting is so important, the common pitfalls and my top budgeting tips.
Why is budgeting important?
It’s an essential financial management tool to drive financial performance and decision making that supports future growth.
Budgeting will help you to:
- Set financial goals and timelines
- Guide your action plan and manage risks
- Allocate and prioritise financial resources to activities that directly contribute to enhancing the financial performance of your business
- Prepare for emergencies and manage cash flow
- Secure finance to help fund growth
Common misconceptions about budgeting:
Every business, no matter its size, requires realistic budgeting processes to meet financial goals for both the short and long term. That is, budgeting is as important for a small business as it is for a large corporation. However, it is often found that small businesses leaders:
- Do not think they need a budget for fear that setting one will limit business growth or tie them to a rigid structure
- Do not develop the right money mindset and perceive budgets to be time-consuming, difficult to predict, difficult to understand and impossible to stick to.
- Often lack time, skills and understanding of how a budget can add value to the business
My top tips for successful budgeting:
- Link your budget to your business goals. Budget assumptions must be based on accurate and current information at hand. These should ideally be updated every quarter. In addition to this, team collaboration and participation should be encouraged as achieving financial and business goals is a joint effort.
- Budgets should be set annually and updated every quarter and as new information arises. Start by looking at your most recent revenues and expenses and compare them to last year (or even the previous 2-3 years). When you do this, you will begin to spot trends, for example, how much have your revenues increased each year and start to see sales cycles. Use this growth rate to calculate your expected revenues for the coming year and then factor in any necessary changes, for example, new revenue channels, new customers, new products, price changes or customer exits etc. From this, you can create a list of expenses by category (wages, utilities, materials etc) and by month. Factor in any changes, for example, changes in staff levels or marketing and promotions efforts where known. Add a buffer to the budgeted expenses (usually 5-10%) just in case you have unexpected bills.
- Understanding your risks.
It is important to consider the long and short term risks your business could potentially face. In doing so, you will be better able to plan for the future. Ask yourself questions such as what factors could impact my business; changes in wage costs, geographical location, insurance costs, seasonal issues, importing costs. Budgeting is a huge topic and not something you may feel confident with. But if I have managed to convince you that your business needs to have budgets in place, then drop me a line and allow me to guide you through the process and in doing so help build your confidence in managing financial risks and performance!
As the founder of Fincraft, I take pride and great satisfaction in helping people like you get their business dreams off the page and into reality by making informed, sensible decisions.
Book in a call and let’s chat about creating your very own business plan – it’s never too late! https://calendly.com/fincraft/30min