Budgets are often viewed as something larger businesses should be doing and will regularly be ignored by smaller set ups.
But believe it or not, it can benefit every entity.From established businesses to start ups just getting started, budgets are vital for all businesses.
It can alsobe considered one of the main reasons businesses fail! We’ve all heard the saying “If you fail to plan then you plan to fail” and this couldn’t be truer for businesses. A budget is a vital part of any business plan, and every business, big or small should have a business plan.
Without a budget a business is in the dark over the businesses finances, and will likely miss opportunities to invest in the future. You see, budgets are less about controlling spending and more about planning for future growth.
But firstly, lets define a budget.
A Budget is a future plan, usually only created once a year. It can be viewed as an “ideal” plan for the next 12 months.
Where do you start?
Start creating a budget using a simple template. I recommend using Excel if you’re comfortable using it. Set up something simple with Turnover at the top, followed by Cost of Sales then Overheads.
Turnover is your sales. Cost of sales are costs incurred that are directly contributable to the sales. For example, if you manufacture items, the materials and labour used to create the item are costs of sales. Your Overheads are costs you would have to pay regardless of the level of turnover, i.e. the costs you would still incur even if you didn’t produce/sell anything.
Once the template is set up. We start from the bottom. Overheads are generally the easiest part of the puzzle to complete. They’re usually fixed costs like rent and rates, plus items which are simple to estimate like property bills and stationary.
We then jump to the top and complete the turnover section. The reason we do this is because for many companies the level of turnover with directly affect the cost of sales. So once you have estimated sales, you can calculate your cost of sales.
Make sure you take your time and if you’re unsure about any costs then do some research. This will be the basis of any future plan so it’s vital you get it right.
What to do with a finished budget.
Well it’s time to put it to work. Each month review the figures achieved compared to the budget. At this point it is probably worth mentioning that it is helpful if you set up your budget split into each month, as well as one for the year. That way you can compare your budget to actual figures achieved on a regularly basis.
What to look out for.
There are 2 main area to look out for when comparing your budget to actual figures.
This is probably the most obvious area to review. The main aspect to consider here is to understand why you have overspent. But not all are bad. If you’ve overspent on materials because you have sold more than great!
This is the area business ignore the most, although they shouldn’t. Underspends are not always a good thing! Again, it’s about understanding. If you have underspent in an area you should understand why. Have you negotiated cheaper rates with suppliers? Are you selling less?
Can you see costs increasing in certain months? Is seasonality going to affect your bottom line? These are things you need to look for to provide yourself with a better understanding of your business.
What about the future?
This is where your budget will really show it’s worth!
Planning for the future is a huge part of most businesses. Particularly for small businesses which are typically looking for quick growth.
Understanding how growth will affect your finances will mean you are prepared well in advance and can react according when revenue does start to grow! You will know when to increase staff, increase advertising or even move premises. Safe in the knowledge you have complete understanding on how it will affect your profits.
It will even put you in a great position should you wish to obtain finance. Showing a lender, you understand your business finances in detail will only increase their confidence in you.