Keeping a clear handle on your costs is one of the most important things you can do as a business owner. However to control your costs effectively, you first need to set out a clear and realistic budget for your business.
For many small business owners, the process of budgeting is limited to figuring out where to get the cash to meet next week’s payroll. However business budgeting is one of the most powerful financial tools available to any small-business owner, and maintaining good short and long term financial plans enables you to control your cash flow instead of having it control you.
The most effective financial budget includes both a month-to-month plan for at least a calendar year and a longer quarter-to-quarter plan to use for financial statement reporting. It should be prepared during the months preceding the financial year-end to allow ample time to gather the information you’ll need.
Your long term plan should cover a period of three to five years on a quarterly basis or annual basis. This long term budget should be updated whenever the short term plan is prepared. In the start-up phase, you will obviously have to make a lot of assumptions about your business when establishing your budget.
You will need to ask questions such as:
- How much can be sold in the first year?
- How much will sales grow in the following year?
- How will the products and/or services you are selling be priced?
- How much will it cost to produce your product? How much stock will you need?
- What will your operating expenses be?
- How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll taxes be?
- What will the income and corporation tax rate be?
- What will your facilities needs be? How much will it cost you in rent for these facilities?
- What equipment will be needed to start the business? How much will it cost? Will there be additional equipment needs in subsequent years?
- What payment terms will you offer customers if you sell on credit? What payment terms will your suppliers give you?
- How much will you need to borrow? What will the collateral be? What will the interest rate be?
It’s really important to be realistic at this point. Entrepreneurs are infamous for being overly optimistic, and you’ll probably not achieve all the sales you think you might and whilst having more expenses than you expected.
As for the actual preparation of the budget, you can create it manually or with the budgeting function that comes with most bookkeeping software packages. And remember that your accountant will be able to help you with this, give you impartial feedback and advice and help you to achieve a balanced and realistic budget.
Above all remember that although budgeting is vital, it is important to avoid getting so caught up in the budget process that you forget to keep doing business.