Over 70% of small businesses in South Africa fail within the first year, and research from UWC cites difficulty accessing capital and a lack of financial planning as major contributing factors to business failure. That’s because preparation and planning are prerequisites of success.
For businesses, particularly small businesses, preparation and budgeting go hand-in-hand. Whether you’re running your first marathon, writing an exam, or starting a business, you must prepare and plan if you want to succeed. When you plan sufficiently and budget effectively, you set yourself up to achieve your business and financial goals.
Often, small business owners start out running their businesses in a relaxed fashion, not taking the time to draw up a comprehensive budget and business plan.
But budgeting helps SME owners to:
- Manage their money proactively,
- Allocate resources effectively,
- Curb runaway spending,
- Make better decisions,
- Monitor performance,
- Identify issues, and
- Plan for the future.
Different approaches to budgeting for small businesses
A business budget should provide an overview of the business’s finances. It should also outline your current financial situation and your long-term financial goals. The aim of creating a budget is to make sure that you have enough money to cover your expenses and meet your desired objectives. With this in mind, you might want to base your budget around specific goals.
For example, you can develop a budget with specific profit forecasts in mind. Decide how much profit you want to make and work backwards to align your budget goals with these figures. A profit-focused approach to budgeting aims to increase sales without also increasing expenses. So, it’s about finding ways to work smarter and more efficiently.
For other businesses, growth is the goal.
Creating a growth-focused budget demands that you close any gaps that might be hindering business growth. This could entail spending more money on training, for example, so that your team has the skills needed to support expansion. Or it could mean allocating funding towards an investment in, or purchase of, another business or new equipment.
Sometimes you have to adjust your budget because the business landscape has changed. Many of us experienced this in 2020 due to the COVID-19 pandemic. When markets are challenging and economies sluggish, a cost-control focused budget will serve you best. These budgets are designed to help you survive the storm. The severity of the cost-control measures you put in place depends entirely on the business’s financial position and the severity of the market downturn.
How to create a balanced business budget
Taking the time to create a comprehensive budget may seem like a lot of work, but it will help you to unlock the financial insights you need to get your business where you want it to be.
Below, we outline a few steps you can follow when drafting a business budget.
Step 1: Calculate your income and sources
You need to figure out your monthly revenue and where this money comes from as a starting point. This is the amount you expect to bring in from the sale of goods or services. This number can be based on your previous year’s income. If you’re running a start-up, you can estimate and benchmark your income by looking at average earnings across your industry.
Step 2: Determine your fixed costs
Now that you know your income, it’s time to tally up your costs. Fixed costs are any expenses that you pay every month. This includes things like rent, insurance, equipment leasing, website hosting, and payroll software subscriptions. Anything that stays the same from month to month should be categorised as a fixed cost.
Step 3: List your variable costs
Variable costs change each month depending on the business’s performance; they also fluctuate throughout the year. If you have more work in one month, your utilities, logistics costs, and commission payments will likely be higher that month. While these can be hard to predict, if you track your variable expenses consistently, you’ll be able to work out a pretty close estimate of these monthly costs. Or you could use cloud accounting software with powerful algorithms that crunch the numbers for you.
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Step 4: Consider once-off costs
Before you think that you’re done calculating costs, you need to consider unexpected expenses that crop up from time to time. Consider unexpected expenses during your financial planning and build up an emergency fund to cover the cost of replacing a printer, for example, or investing in technology to minimise the impact of disruptions like lockdowns and unrest.
Step 5: Understand cash flow
Cash flow is the flow of money into and out of your business. Quite simply, if you have more money coming in than going out over a specific period, you have positive cash flow. Cash flow and profit are very different. You may have a high overall profit (the amount left over from your revenue after your expenses are deducted), but if your cash flow is negative, you might have trouble paying your bills. Cash flow is particularly important for growing businesses because they need cash to buy additional stock or hire new employees. With a proper understanding of your business’s cash flow, you’ll know exactly how much money you have available at any given moment.
Step 6: Revisit and review, regularly
Financial planning and goal setting is a continuous process. It should evolve as your business grows, and you need to be open to adapting your budgets and financial strategies as and when markets change. Small companies should regularly review their budgets because they are less equipped to handle sudden disruptions that demand a shift in funding allocation. Review your budget every quarter and set time aside every month to compare your actual sales and expenses with your projected figures. This lets you identify issues early so that you can course-correct.
Read our other small business guides:
1. Small business guide to succession planning
2. Small business guide to business continuity planning
3. Small business guide to crisis communications
4. Small business guide to cloud migration
5. Guide to creating a business plan