Tips on How to Develop a Budget for Your Small Business
Small businesses have a high mortality rate. One way of reducing the chance for failure is to prepare a budget and a set of financial projections annually. Small business owners cannot just look out the window and come up with pie-in–the sky numbers or hope for more sales. Hope is not an effective business strategy – planning is. If you fail to plan, plan to fail. Too many small business owners go into business thinking they are going to make a ton of money. They never figure out what volume they need, support staff to employ, what to charge for services and what their projected expenses are. A well thought out budget will address all these factors.
Budgeting demands a fair amount of time; time analyzing all aspects of your business.
The Purpose of Budgeting
A well-planned budget provides the road map for what your financial goals and objectives are. This will help you reach those goals. All goals have to be SMART; Specific, Measureable, Achievable, Results orientated, and Timely. So does your budget. For example, knowing you need $300,000 per year in sales to break-even helps give you a specific target to hit. You may want to consider a few other factors when goal setting:
- Is it measurable?
- Is it achievable?
- Is it result oriented?
- Is it timely?
Managing Your Business by Your Budget
Owners of the business should use their budget as a means of management control. They should compare actual results to the budget amounts on a monthly basis. This will allow them to determine what changes or adjustments they need to make to achieve the goals they have laid out. This will help you optimize and maximize the financial performance of your business. Pro-actively addressing problems or noticing potential problems before they turn into bigger problems is vital when managing the financial performance of you business.
Types of Budgets: A Profit Budget and Cash Flow Budget
There are two types of budgets; a cash flow budget and a profit and loss budget. Most business owners do not know that there is a difference between their profit position and cash position. It is one of the most misunderstood business concepts.
- A profit and loss budget concentrates on income and expenses to be incurred in the business during a specified period of time. What is your sales forecast, how and what will you spend on expenses, and what is your projected profit or loss?
- A cash flow budget includes everything in your profit and loss budget plus other sources of cash inflows including loans and any cash the owner will invest back into the business. It projects all cash outlays including loan repayments and owner’s withdrawals of cash.
Budgeting vs. Forecasting
Creating a budget is done at the beginning of the year. Once your budget is in place, that’s when you begin to forecast the business’ future. Now you’re looking at your numbers throughout the year and estimating (re-forecasting) where they will be in the upcoming months and next year, based on where you’re at now. Just like the weather man has a new weather forecast every week, so does your business.
Developing a budget for any business can seem like an intimidating project but the actual process can be very simple. It’s a matter of carefully applying basic business principles to your plan.
If you need help in budgeting for your small business please visit www.ewhsba.com or call 262-796-1040.