“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”
(Lewis Carroll, Alice in Wonderland)
Business owners would do well to heed the wise words of the Cheshire Cat. In the haste and busyness of starting or running a business, it is very easy to pay lip service to budgeting but unless you want to end up “somewhere” as opposed to where you envision your business, this is a vital roadmap. Simply put, a budget is a bird’s eye view of money into and out of the business. It is the most effective way of managing cash flow effectively, while planning for future expenses and growth.
There is a plethora of budgeting software available, however, even a simple Excel spreadsheet is sufficient. The advantage of having a budget is that control is placed in the hands of the business owner, rather than being a victim of fate. It provides solid information on performance (month on month, quarterly, year on year); costs and where streamlining is possible; profitability of certain lines or projects; and data on which to base decisions regarding possible growth opportunities. Without such information, a business owner is literally operating in the dark.
The starting point for creating a budget is always projected income. Where the business has been running for some time, historical data assists with projecting sales, but if this is a new business, such information has to be gleaned from considering similar businesses in the area and customer research. Income is derived from sales, investments, loans and savings. When projecting sales it is preferable to be conservative. It is important to consider seasonal cycles, the macro and micro economic environment (e.g. the investment climate or local industry closures) and internal constraints, such as limited space or machinery output capability.
Once income has been estimated for the budget period (traditionally, a twelve month budget should be developed which then informs quarterly or monthly budgets and vice versa.) then it is necessary to look at the costs. Expenditure should be separated into fixed costs (costs that will not vary regardless of the performance of the business, e.g. rental, utilities, vehicle expenses, salaries); variable costs, (linked to predicted sales volumes, e.g. raw materials, overtime, advertising or telephony bills which will rise with increased sales calls) and once-off capital costs (computer equipment, premises, furniture).
Logically, if you are planning a large sales and marketing campaign for June, then variable expenses will be higher for that month, while revenue ought to increase for the subsequent month/s. This kind of detail may seem torturous the first time round, but the payoff is good financial control and planning which then forms the template for future budgets. Depending on the nature and size of the business, the budget may need to be divided per department or per project and these “mini budgets” feed into the overall operating budget.
Once the income and expenditure has been broken down, it is easy to see whether or not, where and when the business is profitable. The owner can predict when cash flow will be a problem and seek finance with solid figures to support the application. It allows for careful staff planning and the concomitant increase in salaries and furniture or equipment. Most importantly, the business owner is able to evaluate the key business drivers and to troubleshoot possible problems before they become serious.
It is essential that once a budget has been created it remains a “live” document. It is only through constant re-visiting, tweaking and measuring of actual vs budgeted performance that a business owner can be adequately equipped to make sound business decisions.
Key take out: A budget is the roadmap that ensures that you reach your business goals, in the most cost-effective and stress-free manner possible. It provides sound financial information to make sound business decisions.
Author: Janet Askew