A business without a working budget is like a car without a fuel gauge – it will drive for a while, but will run out of fuel when the driver least expects it. This is according to Jean-Claude Mutajogire, Country Manager at Business Partners Rwanda (BUSINESS/PARTNERS), who provides small and medium enterprises (SMEs) with six essential tips for sound business budgeting.
Mutajogire says however that the income estimate is often the portion of the budget that business owners get wrong. "As most entrepreneurs are optimistic by nature, they tend to overestimate projected sales. A budget with overstated income can be just as bad as having no budget at all, as it gives the business owner a false sense of security that budgeted expenses will be covered."
There are a few ways in which entrepreneurs can produce realistic revenue estimates, one of which is to base future sales on historical sales data. "Any deviation from past sales must be based on realistic factors. When the economy falls into a slump, for example, it is dangerous to estimate that your sales will increase in the coming year," says Mutajogire.
Keep it simple: Business owners don't need a fancy app or expert set of skills to draw up a budget. Mutajogire says that budgeting is a basic exercise that every business owner can do on a simple spreadsheet with three columns – budget, actual and variance. "If you know your way around your accounting software and it allows you to draw up a budget, use it. But a simple spreadsheet is more than enough for managing your budget."
Do it yourself: Accountants are useful for helping business owners with tax and financial statements, but business owners who leave budgeting to their accountants are probably over-reliant on them, says Mutajogire.
Mutajogire says that a budget drawn up for the next quarter is invariably more accurate than one drawn up for the next twelve months. "Whatever the frequency of the budget-planning process, it is important that any business compares its actual sales and expenses against the budgeted amounts at least once a month. If not, sales dips and rising expenses will only be noticed once it is too late."
Budget for your extra cash: Budgeting is not only to prevent death by cash-flow crunch, but also to help entrepreneurs plan for what to do with extra capital. "Sensible budgets include plans to invest extra cash into accessible short-term money market accounts, for example, or into long-term investments, such as buying the building from which the business operates if the entrepreneur is sure that income and profitability can be sustained," says Mutajogire.
Be ready with Plan B: Over and above break-even budget mentioned before, sensible business owners should have a plan for when their budget, even their break-even budget, suffers a major knock, such as if a major client goes bust, a fire or break-in disrupts production, a key staff member quits, or an aggressive competitor suddenly emerges. "Entrepreneurs have the temperament to live with such risks. The best entrepreneurs plan for such possibilities, and always keep their budgets close at hand," concludes Mutajogire.