A budget is essential to ensure your SME has a future, but to many budding entrepreneurs, the task of putting one together is both daunting and unknown. Here are some top tips for drawing up a plan to control your finances and give your new business the best chance of success.
Budgeting is essential. It allows you to control your cash flow and make provisions for larger costs, as well as giving you an indication of when the time is right to invest in your idea further and expand it.
You have to stay in control of your expenditure at all times, whether you are a million-rand multinational corporation or a small and operational start-up. The only difference? How much and where budget is allocated.
See your budget as a plan to control your finances. You don’t want to run out of cash and fall short of payments. Similarly, you want to know you can meet your current goals, as well as plan for future ones.
Although it works hand in hand with cashflow projections, it is important to note the distinction between a forecast and a budget.
A forecast is a very important business management tool that is essentially a cost prediction of the future, whereas a budget is a planned outcome of this same future based on the objectives of your business plan.
To break this down even further, a budget is about profit and the cash flow forecast is about cash.
Your budget in practice
Once your business is operational, it’s essential to plan and tightly manage its financial performance. Creating a budgeting process is the way to keep everything on track. See your budget as the GPS for your business – it will keep you heading in the right direction.
A budget should include your revenues, costs, and your profits or cash flow so that you can figure out whether you have any money left over for capital improvements or capital expenses.
A budget should be tabulated at least yearly. Most yearly budgets are also divided up into 12 months, with blank columns next to your estimates to fill in with your actual results as the year progresses.
You have to factor in potential market changes, customers and their demands, competition from rival companies, your business objectives and key performance indicators, team management, forecasts and any obstacles you may encounter along the way.
Related: 12 Simple Start-Up Rules
How to draw up a budget
Dedicate time to this process and, if possible, seek assistance from your accountant or financial team to provide you with estimates for your budget. As a start-up business, it’s likely that this role will land on you, and it will be your responsibility to ensure your budget is realistic.
Your budget must include projected cashflow, typically on a monthly basis. This allows you to pinpoint any issues immediately, rather than waiting, running the risk of making the problem far greater.
A budget must also encompass costs — fixed ones such as rent and salaries, variable expenses including materials and products, and one-off capital costs, such as a lease or buying a computer. Finally, a budget must take account of revenue forecasts. This means both historic sales and future sales must be included.
Don’t kid yourself
There is no benefit to creating an artificial profit by overestimating earnings, or underestimating costs. Make sure you have built in the cost of your time and the sensitivities of seasonality, depending on the market you are entering.
When you grow as a business, you must also consider staff holidays and how this will affect turnover. Although you may not immediately need to give yourself a salary, eventually you will and you will have to include this in your budget, too.
Once you make a budget, you should stick to it, but be open to reviewing and revising it as needed – when the market, pricing, or anything else that could have an impact on your business changes.
Budget to monitor growth
The great thing about budgeting is the ability to benchmark performance. Comparing your budget year on year also allows you to implement your key performance indicators if they do, in fact, need revision, as well as comparing figures for growth and projected margins with your market competitors. Remember to always review and revise.
Ultimately, as an entrepreneur, your business’s budget is also your budget. Owning an SME means allowing it to impact both your business and personal considerations.
Budgeting your own expenditure could mean the difference between success and failure. So be smart with your start-up. Don’t cash out before you can cash in.