In light of the upcoming national budget, I started reflecting on the importance of financial planning for the future. I am thinking that maybe I should develop a budget for my own business but I am afraid that I don’t know how. Can you give me any guidance?
Dear Saving Suzie,
I agree with you that financial planning for the future is essential for sustained growth and development. Like going to the grocery with a list of what you need to buy, a budget for your business is a list of what you need to spend to keep the lights on and stock moving out the door. Getting the numbers right can strengthen the chances of business success.
The budgeting process
The process of preparing your budget starts with a brainstorming session when you collate all the expenses involved in running your business. These figures are taken from actual invoices, past financial data, quotes from potential suppliers, online shopping sites and so on.
Additionally, you should list the costs associated with expansion of your business – dream big and put a cost to it. Where do you want to see your business in three years and five years? What would you need? Get quotes and search online for ballpark figures.
Write everything down and total the figures – yes, it should be a very large figure. This is what you are aiming for. Should a potential investor ask, “What would you do if I gave you $1 million ?” you have a clear, well-defined answer – backed up by numbers. Now that you know how much your dream business will cost, time to get back to reality, for the time being.
You should now whittle down that dream list into the essentials and work with those figures. Categorise your expenses, as this will help you discern if you are spending too much in an area. You must then strategise on how it can be reduced. This technique is particularly useful for overhead and administration areas.
Always budget the full cost of expenses. For example, costs for a car will include monthly loan payments, fuel, insurance, auto detailing and full maintenance costs, so don’t forget regular servicing along with tyres and battery costs.
Follow the same process used to calculate expenses for calculating income. What product or service is your business going to provide to earn income? How much income do you want to generate in three years and five years?
During ongoing budget preparation sessions, you should revisit these future plans. For now, consider your present capacity, how much your business can earn on a monthly basis and add that to your list, under “budgeted income.”
Timeframe – back to the future
After the budgeting process you should have a comprehensive list of the running costs for your business; the assets you want to purchase and various income streams. You then need to analyse the list and assign timeframes to the expenditures. For example, wages may be weekly, while utility bills are monthly. Some expenses have yearly cycles, like tax payments, audits, website hosting, insurance, etc.
During your brainstorming session, you may have listed expenditure that you cannot afford right now but deem necessary for the growth of your business. This type of spending requires planning and you can assign a future time frame in your budget. Having already dealt with expenditure occurring within one year, you can assign what you will need to be spending in three years and five years.
Debt, taxes and inflation
Yes, it is necessary to budget for debt repayments and taxes. Taxes are the kind of expenditure that will increase if you do not plan for it – that is, interest and penalties. However, it is very easy to budget for taxes, since they are usually based on a percentage of your income and profits. Therefore, when you calculate your budgeted income you can also determine your estimated Green Fund, Business Levy and VAT payments and incorporate those figures. Your quarterly budgeted profits should be used to estimate your Corporation Tax instalments. Just remember to schedule these payment dates on your calendar to avoid late-payment penalties.
Similar to taxes, debts can grow if you do not service them. Therefore, remember to include your debt payments (yes, this includes credit cards). If it is long-term debt, you need to project them into your three-to-five-year budgets, taking into consideration any changes in interest rates as per your loan or credit card agreement.
Finally, in the trifecta that is inflation, you should include a percentage increase in expenditure across the board to take into consideration the effect of inflation on your costs. You can use the inflation rate reported by the Central Bank as a guide.
Bare minimum budget
Being an entrepreneur also means you need to have a plan for fluctuating income streams. There will be times when the cheque you were depending on is not “in the mail” and clients will be tardy in processing your invoices. When this happens you also need to know the bare minimum budget that your business can run on until your cashflow stabilises. This is the emergency budget that contains the expenditure that will keep your business running with only the absolute essentials.
While preparing your expenditure budget you need to list “all and sundry” that you require to run your business at present capacity as well as incorporate those items that you would need if you want to expand and grow. However, when it comes to budgeting income, being conservative is best. A business that does not conservatively estimate its income will potentially have problems should those projections not materialise.
You will need to analyse your income received for the past six months and a year to try to determine your income cycle. The income streams of most businesses ebb and flow during the year and being aware of that cycle for your type of business allows you then to plan for periods of slow business with strategies to increase sales. Analysis may also help you determine if you need to diversify your service or product offerings in order to smooth out your income cycle.
Budget deficits and surpluses
You may think that you want to have budget deficits in expenditure and surpluses in expected income. While this may be true, if it happens, it means that you need to review and revisit your budget. A budget is not set in stone, but must be adjusted to reflect the changing business landscape. External factors that you have no control over may affect your business budget, resulting in deficits or surpluses, and you will need to adjust accordingly. Remember that the key is to ensure that your expenditure budget is as realistic as possible and your projected income conservative.
Review and revisit
The business budget should be reviewed at least annually. You should have your actual income and expenditure figures on hand for comparison with your budgeted figures. Any deficits and surpluses should be analysed and explained. You should also review your three and five-year projections to see if your assumptions are still valid or need to be adjusted.
Budgets: your business superhero
You should not be afraid of the budgeting process, but rather embrace the fact that it forces you to perform an analysis of your business that you may not do otherwise. It provides you with a plan for rainy days as well as a plan for what to do with unexpected windfalls so that these funds will be used in a way that advances the goals of the business. A well-prepared budget incorporates your actual financial data and allows you to potentially create the future you want for your business, but it can also swoop in and save the day when income fluctuates.
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Today’s response was written by AFETT membership director Dulcie Furlonge. Learn more about AFETT at www.afett.com, search for AFETT Events on Facebook, follow us @AFETTEXECS on Twitter or contact us at (868) 343-2160. E-mail us your career-related questions at firstname.lastname@example.org.
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