You would think any business owner would jump at such an aid, says David Morobe, regional general manager at Business Partners Limited (BUSINESS/PARTNERS). But all too often, business owners are too bogged down in their day-to-day crises and opportunities to spend much time on a simple, practical business budget, which truly does bestow all of the listed benefits on a business if it is compiled and used correctly.
David offers the following pointers for business owners who want to get serious about budgeting for their businesses, and lists a few of the common pitfalls of the process:
Take it out of the drawer
A proper business budget is not a once-off exercise that is compiled for a finance application and left to gather dust in a drawer. It is a living, ever-changing tool that is regularly reviewed, adjusted, tweaked and referred to by business owners, particularly if the business is growing and planning to move into new areas. At the very least quarterly, but preferably on a monthly basis, the projected budget for the past month should be compared with the actual outcomes so that trends can be spotted, costs can be brought under control, problems can be diagnosed and the budget for the coming months adjusted. Using up-to-date budgets enables flexibility and proactive management of cash flow.
Keep it simple
The best business budgets are detailed, but not too complicated. What you need is to work out your projected sales, the direct costs and fixed costs, often comprising the main categories of overheads such as rent, electricity, labour related expenses and insurance. While the accounting software that you use may well allow you to drill down to precise expense items, use it at a level where the essence can be monitored in at a glance. If your budget is in any way confusing or if it is too granular for you to easily get an overview, then it is not helping you keep your business on track.
Project revenues realistically
One of the trickiest bits of a budget, but also one of the most important, is getting your sales projection right. Business owners are usually optimistic by nature, and therefore the most common pitfall tends to be overestimating sales. Past sales are a very important benchmark to use, but try to be honest with yourself about the chances that a big outlier sales spurt will repeat itself in future. Be sure to take into account changing conditions in the market and changes in your competitor landscape that will affect your sales. If a direct competitor opens down the round, you must budget for lower sales, no matter how much it goes against your optimistic grain.
Although it happens less often, underestimating your sales will leave your business unprepared and unable to capitalise on a growth spurt. Be sure to plan for increased sales after a big marketing drive, or after a close competitor closes down.
Nobody can predict the future, but by regularly reviewing your sales projections with the actual outcome, you can become much better at basing your projections upon realistic growth expectation.
Research your costs
The flipside of the too-optimistic sales prediction is underestimating your costs. Some costs are easy to predict once they are established in your business, provided they are reviewed regularly, but unexpected expenses could easily set you off track and make it hard for you to accomplish your goals. Your budget needs to be created taking into account the key drivers of your business - your fixed and variable costs.
This should help ensure that your costs are more or less realistic and you have a budget that has you ready for day-to-day decision making.
Once proper research is built into your budget process, you’ll be better able to plan for the costs of operating your business and make informed decisions.
You need to focus on expenditure that will promote the growth of your business. Every line item in your budget should be scrutinised for whether it is really necessary, or whether it is simply nice to have. If an item does not contribute to business sustainability and growth, seriously consider taking it out. And, don’t forget your taxes. It may sound like stating the obvious, but it happens surprisingly often that business owners forget to include the business’s tax obligations in their budgets, especially when planning their cash flows.
An effective budget will not only control your cash flow and make provision for unexpected expenses, but will also give you an indication on when the time is right to invest further in your business and expand it.