One of the keys to business success is budgeting. A budget is used to provide a picture of money that is coming in and money that is going out of the business. Once these figures are determined you are able to put in place some forecasting and forward planning solutions that will help you to allocate resources where they are most needed. By monitoring your budget you should be able to cover any future expenses, if and when they arise.
The first step to creating budget is to work out the amount of income your business is likely to earn and spend within the budget period. It is very important to be realistic when creating a budget; if you overestimate your income (or underestimate your expenses) then you could run into some trouble later on.
Consider the following before you begin your budget:
- The projected sales for your business
- The direct costs of sales ( this includes the price of materials, components or subcontractors that are used to help create your final product)
- The fixed costs and/or overheads
If your budget shows that you are making a profit, this is referred to as disposable income, or loss is seen as the amount that you are overspending. Upon completion of a budget, if you find that you are spending more than you earn, then you need to take action and you should either look to cut back on your spending, or find more sources of income. Additionally, your current budget may show a profit but you may want to increase that amount, and so the completed budget can help you see where you may be able to cut costs or further increase incoming funds.
Some quick budgeting tips:
- Maintain measurable targets that your budget is able to clearly display - this acts as extra incentive to succeed.
- Don’t just keep with your original budget – reassess it every now and then, and alter it if necessary to reflect changes you feel are needed to improve its efficiency.
- Having a budget is not all about sacrifice – if you save more than expected, or reach a goal early, treat yourself every now and then for all your hard work.
If you don’t already have a business plan it is a great idea to have one as it goes hand in hand with a budget. Creating a business plan is not just about writing a report. It is a process and a guide for you and the direction you envisage for your business. When producing a business plan you want it to be comprehensive, well-researched and credible. To ensure this occurs it is essential to sit down and figure out what you want and need to get out of the business plan. A business plan should allow you to better establish projected sales, cost of sales, fixed costs and overheads.
Once you know the figures for the income and expenditure of your business, you should be able to work out how much profit your business is generating. A better understanding of your costs will make it easier to figure out work out ways to reduce them, as well as recognising any cash flow problems. Monitoring cash flow throughout the budgeting period is also important as this can help you to be as prepared as possible for any large costs that may arise, either expectedly or unexpectedly, as well being able to see quickly and easily whether you have funds available for that new tool or resource that could further improve your business.
It is vital that you stick to your budget in order to manage your business’ money; however it is also just as important to monitor it and keep it current. By reviewing and revising your budget when necessary your business will have a much better chance of staying on top of its financial situation and essentially, a better chance of success.
Michael Quinn, director of The Quinn Group, is a holawyer, accountant and educator.