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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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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

4 Ways To Improve Your Budgeting Skills

Increasing revenue isn’t solely dependent on how much money your business is making but also relies heavily on how well you manage it.

Josh Althuser

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Traditional budgeting methods have undergone a digital makeover in recent years, and now offer businesses an abundance of streamlined services, tools and access to experts that will help improve your budgeting skills. From regulating current expenses to applying for funding, a well-crafted budget is an essential part of developing a healthy financial forecast for any business.

1. Take advantage of budgeting software

Creating an effective business budget will require a bit more than just utilizing a personal financing software. Luckily, there are plenty of tools available that focus on helping you get your professional finances in order. Centage, which came out in 2001, is a powerful portal that gives companies the chance to streamline their budgeting, while also providing forecasting and consolidation features to help you create more strategic budgeting plans. Investing in a budgeting software is a great way to stay organized at any stage of your professional development.

2. You can’t predict the future, but you can prepare for it

In addition to making the most of the available budgeting tools on the market today, it also pays to do your research. Understanding market fluctuations, as well as competitor activity, will help you create a clear budget plan based on these variables. Keeping up to date on the changes that tend to happen frequently within your industry will also grant your business a bit of extra confidence when it comes to making future decisions. Budgets can provide a strong financial forecast help businesses adapt quickly to changes that might have set them back in the past. For example, if your product is largely dependent on seasonal trends, these projections will give you a greater sense of which months you will be seeing more revenue, allowing you to allocate these funds accordingly throughout the year.

Related: It’s Vital To Your Business Success: How To Manage Your Budget Better

3. Ask an expert

Creating an effective budget for your business goes way beyond simply organizing your finances. Reaching out to an expert to help you construct a budget that fits both your personal and industry needs can better schematize your current plan, and potentially make your business model more profitable.

The rapid growth of the freelance economy has resulted in the creation of platforms that give businesses, big and small, access to a wealth of skilled finance professionals. Whether you’re in the market for a quick consulting session, or on the lookout for a long-term advisor, speaking with someone who specializes in creating budgets for business is a great way to gain valuable insight on the best ways to handle your finances. 

4. Don’t forget about funding

Access to funding is an important resource for any business, especially those that are in the early growth stages. Whether you are starting out small with a modest self-investment, asking friends and family for a bit of help, or preparing to pitch a big name investor, having a financial forecast in place is a must.

For those that are hoping to get their hands on VC funding, presenting current activity and future financial projections is an essential part of the process. Of course, investors understand that budgets are subject to change, but without a financial plan in place, investors may question whether or not your business is a worthwhile investment. A clearly constructed budget can help illustrate the value of your company, in addition to showing what will be done with supplementary funding to increase growth.

Related: 7 Ways To Be Debt Free For The Rest Of Your Life

For small and big businesses alike, an agile and well-crafted budget is key when it comes to maintaining and improving your company finances. From managing the day to day expenses to preparing for unexpected changes in the market, getting into the habit of good budgeting is the best way to ensure steady growth for your company.

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Budgeting

It’s Vital To Your Business Success: How To Manage Your Budget Better

Should I take budgeting seriously, and what can it do for me?

Ed Hatton

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A budget is or should be a part of your business plan. It is one of the major control methods to make sure your plan is implemented rather than ignored.

I agree that there are some very successful businesses that operate on a seat-of-the-pants basis, but there are a lot more trying to do so but instead floundering around in the dark.

Unless you are gifted with unerring judgement and great insight you are likely to achieve more success by working to a plan and budget.

Budgets are often prepared by financial managers and tend to focus on operating and capital expenditure rather than sales, purchases, inventory and debtors targets. A better approach is to start by agreeing what performance your company would like to achieve for all key areas.

Related: 6 Simple Ways To Build Brand Credibility On A Tight Budget

The sales budget could be a separate section of the main budget to manage expected sales by whatever breakdown suits your business: Type of product, by division, branch or sales channel, or type of customer. In each category budget for margins, discounts and commissions.

Correctly managing your expenses

expenses-for-businesses

Key expense items like payroll, overtime, marketing promotions, travel, vehicle expenses and IT costs should be planned for and monitored via the budget but I suggest you don’t clutter the expense budget with too many items which you have little power to manage.

Rather lump these together, you can always drill down if the costs get out of hand. If you have a seasonal business with variations in sales and expenses depending on the time of the year, make individual budgets per month.

Do not forget balance sheet lines, especially capital expenses for new buildings, machinery or vehicles, and also borrowings and other liabilities.

Related: 5 Budget Pitfalls To Avoid In Your Business

Debtors, creditors and inventory should all be planned and monitored and it is a good idea to monitor measures like average days outstanding for debtors and creditors, days inventory held, bad debts and obsolete or lost stock.

The last items can be target ratios which may not form part of the budget, but should be reported on regularly so that you do not get nasty surprises at the year end. Prepare the budget with everyone concerned to get buy-in. The budget becomes an agreed plan of operations to which everyone is committed.

Continuously review your budget

budget-review

Monitoring performance against budget should be done at least quarterly, but I prefer once per month in a management meeting. If you are the only manager, set aside time each month for a vital review your performance against budget.

The actual results must be up to date and available. Use a simple spreadsheet showing budget, actual and variance or a dashboard which shows key metrics as graphics or tables.

Examine those items where the variance to budget is significant and probe for reasons. The dangerous ones are the start of a trend — for example sales in one area consistently below budget or mushrooming overtime costs.

For any bad variances that are not just a short-term hiccup you should plan to correct the problem, or if the problem is insurmountable, replan to get around it.

Course correct your budget as you grow

The budget can be changed because circumstances are different to those envisaged when the budget was prepared, but a better option is to add another column for a revised budget, so the amount of the change remains obvious.

Related: 7 Creative Strategies For Marketing Your Start-up On A Tight Budget

Managing the budget should not be limited to complaining about excessive entertainment or travel costs, but a vital tool to give stark visibility to key areas of the business that are not performing as expected.

It should involve all the key players in decision-making to catch and fix problems early, but also to seize opportunities presented by better-than-expected performance at the earliest time.

Treat budgeting as a management tool and it is likely to treat you to more profit and less nasty surprises.

Do this

An excellent way to increase profits is to treat budgeting as a management tool. Never be scared of your budget — use it instead.

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Budgeting

#Budget2017: 5 Areas Where Businesses Are Seeking Clarity From The 2017 Budget Speech

Here are a few other points I hope Minister Gordhan will clear up in his Budget Speech this year.

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Yolandi Esterhuizen, Compliance Manager at Sage, on a few points that she hopes Minister Gordhan will clear up in his Budget Speech this year.

We’ll all be watching Finance Minister, Pravin Gordhan, closely on 22 February when he will present his Budget for the 2017/8 tax year.

With a revenue shortfall of around R28 billion to plug and slow economic growth, he is expected to announce some tough tax measures to ensure government has enough money in its coffers to meet its objectives.

Compulsory annuitisation of provident funds

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Members of retirement funds and payroll administrators alike would like to see clarity around this long outstanding issue. At the moment, provident fund members may take all of their retirement savings as a lump sum upon retirement.

Government wishes to align provident funds with pension funds and retirement annuities – with these classes of retirement funding, members must reinvest their retirement pay-out into a vehicle that will pay them annuities each month.

Related: Budgeting Basics

In January last year, Government announced that compulsory annuitisation of provident funds would take effect from 2018. However, provident fund members started to enjoy a tax deduction on their contributions from March 2016.

Government said last year that it would review the tax benefit for provident fund members to achieve fairness between all retirement funds if an agreement is not reached within two years. Removing the deduction would cause a decrease in the net pay of many individuals who pay into provident funds.

Post-school education

budget-speech-2017-university-education

The #feesmustfall movement has yet to lose momentum and funding for tertiary education remains high on the agenda. We may hear more about how government will incentivise businesses to help employees pay for their children’s university education through loans or bursaries going forward, given the pressure to help youngsters pay for their education.

The Taxation Laws Amendment Act, 2016 promulgated on 19 January 2017 provides for an increase in the amounts which are exempt in terms of bursaries provided to employees’ relatives.

If an employee earns more than R400 000 a year, the full bursary is taxable. R400 000 or less, a portion of the bursary is exempt.

Related: Budgeting Mistakes

National minimum wage

minimum-wage

The National Minimum Wage Panel Report last year recommended that government sets a minimum wage of R3,500 per month for full-time workers, or R800 per week, or R20 per hour.

This follows extensive consultation between government, business and labour, with the aim of setting a wage that reduces poverty and inequality. It seems that the National Minimum Wage may be implemented sooner than many of us expected.

The devil will be in the detail. Will there be any regional or sectorial exclusions? How long will business have to phase in the new minimum wage?

Government knows that there is a balance between setting the minimum wage that will have positive impact on inequality without affecting job creation, undermining the sustainability of the country’s enterprises or triggering high inflation.

National health insurance

national-health-insurance

The White Paper on National Health Insurance (NHI) was published for comment on 11 December 2015. Though pilots are underway for the NHI, there isn’t much clarity about how it will be funded. A payroll tax is one option government has put on the table, but a VAT increase is also an option.

NHI is being implemented in phases over a 14-year period that started in 2012, but most stakeholders are anxious to get clarity about the funding model. Hopefully, Minister Gordhan will provide some insight in his Speech.

Related: 5 Budget Pitfalls To Avoid In Your Business

Additional revenue?

It is yet to be seen whether the Minister will opt for new taxes in the vein of carbon and sugar taxes announced in recent years, hike personal or company taxes, or increase the VAT rate.

We have long speculated that government may add an additional income tax bracket for high income earners, or look at wealth taxes in its search for new revenue and its quest to reduce inequality.

Millions of entrepreneurs in the world’s Small & Medium Businesses trust Sage as they power the global economy.  We will be waiting to see how the Budget will affect payrolls and accounting so that our customers will be ready for any new rules and regulations the government introduces.

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