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Budgeting

Budgeting Basics

Business budgeting is one of the most powerful financial tools available to any small business owner.

Entrepreneur

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BudgetingBasics

Put simply, maintaining a good short- and long -range financial plan enables you to control your cash flow instead of having it control you. The most effective financial budget includes both a short-range, month-to-month plan for at least one calendar year and a long-range, quarter-to-quarter plan for financial statement reporting.

It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information-gathering.

The long-range plan should cover a period of at least three years (some go up to five years) on a quarterly basis, or even an annual basis. The long-term budget should be updated when the short-range plan is prepared.

While some owners prefer to leave the one-year budget unchanged for the year for which it provides projections, others adjust the budget during the year based on certain financial occurrences, such as an unplanned equipment purchase or a larger-than-expected upward sales trend.

Using the budget as an ongoing planning tool during a given year certainly is recommended. However, here is a word to the wise: Financial budgeting is vital, but it’s important to avoid getting so caught up in the budget process that you forget to keep doing business.

Budget for the Income Statement and the Balance Sheet

Many financial budgets provide a plan only for the income statement; however, it’s important to budget both the income statement and balance sheet. This enables you to consider potential cash flow needs for your entire operation, not just as they pertain to income and expenses.

For instance, if you’d already been in business for a few years and were adding a new product line, you’d need to consider the impact of inventory purchases on cash flow. Budgeting only the income statement also doesn’t allow a full analysis of the effect of potential capital expenditures on your financial picture.

For instance, if you’re planning to purchase real estate for your operation, you need to budget the effect the debt service will have on cash flow.

Budgeting for Start-up

In the start-up phase, you’ll have to make reasonable assumptions about your business in establishing your budget. You will need to ask questions such as:

  • How much can be sold in year one?
  • How much will sales grow in the following years?
  • How will the products and/or services you’re selling be priced?
  • How much will it cost to produce your product? How much inventory will you need?
  • What will your operating expenses be?
  • How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll and unemployment taxes be?
  • What will the income tax rate be?
  • What will your facilities needs be? How much will it cost you in rent or debt service for these facilities?
  • What equipment will be needed to start the business? How much will it cost? Will there be additional equipment needs in subsequent years?
  • What payment terms will you offer customers if you sell on credit? What payment terms will your suppliers give you?
  • How much will you need to borrow?
  • What will the collateral be? What will the interest rate be?

As for the actual preparation of the budget, you can create it manually or with the budgeting function that comes with most bookkeeping software packages.

Ongoing Budgeting

The first step is to set up a plan for the following year on a month-to-month basis. Starting with the first month, establish specific budgeted rand levels for each category of the budget.

The sales numbers will be critical since they’ll be used to compute gross profit margin and will help determine operating expenses, as well as the accounts receivable and inventory levels necessary to support the business.

In determining how much of your product or service you can sell, study the market in which you operate, your competition, potential demand that you might already have seen and economic conditions.

For cost of goods sold, you’ll need to calculate the actual costs associated with producing each item on a percentage basis.

For your operating expenses, consider items such as advertising, auto, depreciation, insurance and so on. Then factor in a tax rate based on actual business tax rates that you an obtain from your accountant. On the balance sheet, break down inventory by category. For instance, a clothing manufacturer has raw materials, work-in-progress and finished goods.

For inventory, accounts receivable and accounts payable, you’ll figure the total amounts based on a projected number of days on hand.

Consider each specific item in fixed assets broken down for property, plant, equipment and so on. If your new business requires a franchise fee or copyrights or patents, this will be reflected as an intangible asset. On the liability side, break down each bank loan separately. Do the same for the shareholders’ ordinary shares, preference shares and loans.

Budgeting for Years Two & Three

Do this for each month for the first 12 months. Then prepare the quarter-to quarter budgets for years two and three. For the first year’s budget, you’ll want to consider seasonality factors.

For example, most retailers experience heavy sales from October to December. If your business will be highly seasonal, you’ll have wide-ranging changes in cash flow needs. For this reason, you’ll want to consider seasonality in the budget rather than take your annual projected year one sales level and divide by 12.

The Process

As for the process, you need to prepare the income statement budgets first, then balance sheet, then cash flow. You’ll need to know the net income figure before you can prepare a pro forma balance sheet because the profit number must be plugged into retained earnings.

And for the cash flow projection, you’ll need both income statement and balance sheet numbers.

Consult with an Expert

Whether you budget manually or use software, it’s advisable to seek input from your accountant in preparing your initial budget.

Your accountant’s role will depend on the internal resources available to you and your background in finance: You may want to hire an accountant to prepare the financial plan for you, or you may simply involve them in an advisory role.

Regardless of the level of involvement, your accountant’s input will prove invaluable in providing an independent review of your short and long-term financial plan.

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Budgeting

Planning A Year End Function On A Budget? Five Fabulous Tips To Get The Most Bang For Your Buck

Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.

Revel Africa

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When you’re desperate for your event to be spectacular, but only have a shoestring budget to work with, then don’t despair, and by all means don’t settle for second best – it might be time to think out of the box this festive season.

When it comes to putting on First Class events, even if our clients’ budgets lean slightly more towards Steerage, we have had our experience and expertise tested many times over, and have never failed to deliver memorable and delightful events using these techniques.

Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.

1. Location, Location, Location

Unless you have your own venue, sourcing one may be one of your biggest items on your event budget. This should be looked at early into the planning process. It’s imperative to book a venue in advance to avoid last minute booking fees.

When it comes to finding a venue, don’t be afraid to approach things differently. There are often clever ways of using a fancy venue that may be less expensive. For instance, instead of using a venue’s master ballroom, enquire about their balcony, courtyard, or rooftop. You still get the advantage of a spectacular setting, but at a vastly reduced cost.

Consider also that mornings are often cheaper, especially if the venue can be turned around and used for another function later. Mondays are often quiet too and thus leaves room for negotiation.

2. Fun Food and Beverage

Believe it or not, your eats and drinks are not actually the hero of the event. When allocating budget and suppliers for catering, choose options that are satisfying without feeling pressured to produce over-the-top cuisine. More than that, overly-fancy or daring food could actually make people feel uneasy, and might have the opposite effect of what you want to achieve for the event – which is, people enjoying themselves!

With a small budget you have an opportunity to think creatively and venture away from the conventional approaches while remaining cost-effective. Try fun options like food trucks or mobile kitchens, if the venue allows external vendors.

Catering can be simple, yet still a crowd-pleaser.

Related: Year-End Doesn’t Have To Be A Pain For Your Business

3. Be flexible, stay open-minded

Successful event planning on a budget is all about seeing potential. You might come across free or cheaper items which may not be the exact things you wanted, but they still do the job. It might even spark another idea for decor or an activity that can work around these budget items better.

Recycle items instead of purchasing new items for every event. Reuse these items at multiple events . You can save by choosing to have items designed in such a way that they can be reused, by only changing certain parts or nothing at all.

4. Don’t be too proud to ask for sponsorships

Consider turning to sponsors to cover expensive items that are critical to the event. You might approach an existing supplier or technical partner to your business to cover costs in exchange for some tasteful brand exposure at your event, or a mention from the podium during speeches. Ensure that you have the data and audience information to make your pitch enticing.

5. Keep track…of everything

Finally, it’s important to keep track of all expenses, including the bitty ones, as they do add up quickly. The tighter the budget, the tighter you ought to be on your spending and make sure each one of the expenses is accounted for. Make sure that you’re fully aware of any hidden fees, such as set up, delivery and break down costs, prior to signing the contracts with your venue and vendors. Unforeseen costs only tend to pop up in the final invoicing stages, with a surprising figure. Check contracts, double check proposals and counter-check with final bills.

Here’s to a fabulous Year End Function!

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Budgeting

5 Ways To Make An Impact On A Shoestring Budget

There are several ways to get involved with NPOs that do not necessarily involve funding.

Nation Builder

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If you are an entrepreneur or small business owner that wants to give back to the community, but aren’t sure that you have the funds to make a real impact? There are several ways to get involved with NPOs that do not necessarily involve funding.

1. Donate your time

If you are a busy entrepreneur, you might be tempted to simply donate money to a charity, but making an impact is about more than just the money.  Your time and commitment to a cause that you are passionate about can make a real difference.  Ask what an NPO can achieve with the time and skills you are able to donate, and partner with them to reach their goals in a sustainable manner.

Related: 5 Budget Pitfalls To Avoid In Your Business

2. Involve your employees

Your staff and your company’s time and expertise can be extremely valuable in building capacity, by sharing knowledge and skills with NPOs. Volunteering can make your employees feel good about themselves and proud to be part of your business, improving morale. It can even help you to retain or attract staff. Millennials, especially, want to work for companies that are part of something meaningful.

3. Focus your efforts

Try focusing on one or two causes where your resources and energies make a real impact, rather than attempting to be part of solutions for too many causes. You will end up making very little difference if your efforts are spread too thin. Take the time to determine what social or development issues are close to your company’s DNA, purpose and vision.

By making sure the cause is a good fit with your company’s brand and core objectives you ensure that whatever you can offer an NPO will make an impact on their operation.

Related: How To Start Your Business With No Budget

4. Be committed

Effective social engagement is about long-term relationships and commitment. It takes time and sustained effort to make a real difference to the organisations with which you partner. Take the time to understand their core purpose, capacity, resources as well as the needs of that organisation in order to make a meaningful contribution.

5. Donations of goods or products

Does your company offer a service or produce goods that might be useful to an NPO? Offering services or products that NPOs most often do not have the budget for can equip and empower them to do their work more effectively for greater impact.

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Budgeting

A Strategic Approach To Enterprise Cost Reduction

During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.

Daryl Elliot

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Companies in South Africa face a number of challenges that include slow Gross Domestic Product (GDP) growth, high unemployment and uncertainty associated with the current political environment. The tsunami of change driven by digital disruption as a result of the fourth industrial revolution has spread across the continent, potentially reshaping the competitive landscape in all regions. To tackle these complex and varied challenges, many South African companies may need to pursue cost reduction more aggressively.

Overall findings in Deloitte’s Strategic Cost Reduction Survey launched earlier this year found that South African companies cited “macro-economic concerns and recession” as a top external risk much more frequently than the European Union (EU) average (59% versus 34%).

Compared to European companies, South African companies posted worse historical results with over 40% of respondents stating that revenue has either remained the same or decreased over the past 24 months.

The survey found that the dual margin approach has been the norm for South African companies with cost reduction targets set very high and even higher cost program failure rates. One question to ponder is whether executives in the South Africa have subconsciously accepted the barriers and scaled back their cost reduction actions accordingly – even if a more aggressive approach to cost management could help their businesses thrive? During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.

Re-examining the strategy

Before designing a cost reduction programme, make sure your overall business strategy is still relevant within the current  environment. Organisations transform their business for different reasons. Some are positioning themselves for new growth opportunities while others are restructuring to improve efficiency and reduce costs. What they have in common is the desire to dramatically improve their business performance.

Related: Symantec Calls for 80% Reduction in Operating Costs

Cost reduction programmes are commonly carried out in silos, without much more coordination than each having some portion of an overall rand target to meet. The task then becomes so complicated and fraught with sensitivities that little happens in the way of sustainable efficiencies. But it needn’t be so. If you go to the trouble of mobilising for cost reduction, you might as well make it stick, and create some competitive advantage along the way.

Traditionally, a company bases its strategy on its best prediction of what events could affect its business, and when. But in a fast-changing business environment, you need an approach that doesn’t require you to pretend to have a clear picture of the future. One way to do this is to define a range of scenarios of what the future may hold. Then, develop the best strategy to respond to each scenario. Initiatives that make sense only for certain scenarios become your “contingent strategies.” Once you formulate the core and contingent strategies, your cost reduction program will have to be just as flexible.

Establishing a cost base

A cost reduction programme is only as good as the data it’s based on. You need detailed cost data to identify which factors are driving business costs, as well as to justify cost reductions. The next step, therefore, is to figure your current cost baseline. The cost baseline indicates the costs you would incur if you took on no new cost reduction initiatives and with a cost baseline, you can measure the effect of your cost reduction programme by comparing actual costs to the expenses that would have occurred without it.

Start by updating the current year’s budget to reflect any new efforts, such as staff changes or the introduction of new products. This is a good time to cancel anything that cannot be resourced or no longer supports your strategy. Next step is to analyse your costs and headcount by business line, function, and location. Clearly state any rules for allocating centralised functions or shared services to individual lines of business.

While you’re doing this, try to figure out how your business came to have the cost structure it does. It probably is a product of many leadership regimes and acquisitions. Understanding the history can help you identify promising areas for cost reduction. Assess how each areas performance compares to that of best-practice organisations. If there’s a gap, determine how much you’d need to improve in order to close it. At the end of this project, you should have a decent sized list of potential cost reduction initiatives.

Set Cost Reduction Targets

One way to establish cost reduction targets is to try looking at them from several perspectives, such as:

  • Contribution to Strategy – How the initiative will affect your strategic goals and impact on business Continuity.
  • Investor View – This is how much cost cutting you need to do to support your current share price, assuming revenues stay flat. If you look at cost reduction from all three perspectives, you can triangulate them to set a cost reduction target that’s both achievable and acceptable to investors. Competitive View – Tally how much you need to save in order to become as efficient as the top performers in your industry. Knowing what your peers have achieved can give you an idea of what you can achieve.
  • Operational View – Looking at each line of business to identify potential cost savings, and then aggregate them across the company.
  • Ease of Implementation – Identifying whether there are any technical or cultural obstacles to implementation and how you deal with them?
  • Risk – In terms of how significant are any implementation risks?

Companies that are able and willing to make bold cost moves could find that the current economic environment is a prime opportunity to position themselves for long-term success. Tactical cost actions alone will likely not be able to deliver the required level of cost savings. Companies need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralisation, reconfiguring the business, and outsourcing/offshoring business processes.

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