Small businesses need to be flexible to operate in a fast-changing world, so there is no point in labouring over a huge, formal budget that will soon be out of touch with the reality of your business. But budget you must.
How to get started: Keep it simple. While some people will use a finance software package and others a spreadsheet to create their budget, a pen and two sheets of paper - one headed "income" and the other "expenditure" - will work just as well.
However you do it, remember to consider such factors as growth, marketing, competitors, potential demand for your products/service, and the current economy in your calculations.
What to include in "income": Your income sheet should list your minimum estimates for sales and other major revenue-producing categories.
This should be based on actual previous sales (if it's not a completely new business) and proposed future sales. Include the minimum estimated sales of products or services, as well as other sources of income.
What to include in "expenditure": Expenses are your total fixed and variable costs. List all your major costs and estimate your maximum monthly expenses for each category.
Fixed costs or overheads include:
- Premises (rent or mortgage, rates, levies, and service charges)
- Financing (any loan repayments)
- Staff (salaries, medical, pension, etc, including your own)
Variable costs include:
- Raw materials or goods for resale
- Casual labour, bonuses, overtime, etc.
- Sales commissions
- Repair and maintenance
- Printing, postage, stationery and couriers
- Advertising, marketing and promotion
- Travel and expenses (petrol and tolls)
- Legal and professional costs
- Utilities (electricity; internet connections and cell phone bills)
- Direct costs of sales (such as costs of materials, parts or services to make the product or supply the service)
- Capital costs, such as computer equipment
By having a basic budget in place you'll be able to see your month-by-month projected cash flow for the next 12 months, and are more able to avoid any possible problems before they happen
Once you can see at a glance your income and expenditure status, you can then start to project your profit, or return on investment.
Subtracting your expense total from your income total will give you a net income - or how much money you're business is predicted to make.
If your budget shows that your business won't make enough money to keep it running and pay you a sufficient salary, go back and take another look at your calculations.
Work out ways to reduce your costs, go to suppliers and renegotiate rates, and find ways to increase your sales.
By having this information on hand for the next financial year you'll feel more in control and increase your chances of building a successful business.
You'll be able to see immediately if you can afford extra staff, marketing or equipment; or if you're spending too much on salaries or raw materials. You'll be able to talk intelligently and confidently should you need finance, and you won't be caught by surprise by lack of cash flow.
So, if you thought creating a budget was scary, imagine running a business without one ...