Budgeting is essential. It is the most effective way to ensure your business has a future. It allows you to control your cashflow and make provisions for larger costs, as well as giving you an indication of when the time is right to invest in your idea further and expand it. You have to stay in control of your expenditure at all times, whether you are a billion-dollar multinational corporation or a small and operational startup. The difference? How much and where budget is allocated.
A budget is a plan to control your finances. You don't want to run out of cash and fall short of payments. Similarly, you want to know you can meet your current goals, as well as plan for future ones.
Although it works hand in hand with cashflow projections, it is important to note the distinction between a forecast and a budget. A forecast is a very important business management tool that is essentially a cost prediction of the future, whereas a budget is a planned outcome of this same future based on the objectives of your business plan. To break this down even further, a budget is about profit and the cashflow forecast is about cash.
Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the way to keep everything on track. You must focus on profits, costs and returns on investment. Additionally, you have to factor in potential market changes, customers and their demands, competition from rival companies, your business objectives and key performance indicators, team management, forecasts and any obstacles you may encounter along the way.
Now, you may be wondering how to draw up a budget. Firstly, you must make sure you dedicate time to budgeting and, if possible, seek assistance from your accountant or financial team to provide you with estimates for your budget. As a startup business, it is likely that this role will land on you. It will be your responsibility to make sure your budget is realistic.
In a budget, you need to include projected cashflow, typically on a monthly basis. This allows you to pinpoint any issues immediately, rather than waiting, running the risk of making the problem far greater. A budget must also encompass costs – fixed ones such as rent and salaries, variable expenses including materials and products, and one-off capital costs, such as a lease or buying a computer. Finally, a budget must take account of revenue forecasts. This means both historic sales and future ones must be included in a budget.
It is important to note that there is no benefit to creating an artificial profit by overestimating earnings, or underestimating costs. You have to make sure you have built in the cost of your time and the sensitivities of seasonality depending on the market you are entering. If you are selling wellingtons for example, be prepared that summer will be a dry season – quite literally. When you grow as a business, you must also consider staff holidays and how this will affect turnover.
Although you may not immediately need to give yourself a salary, eventually you will have to include this in your budget, too. I can recall an enthusiastic salesman coming into the den to pitch his idea. Although an interesting business idea, with projected profits of £50,000 in year one, with a salary at the time exceeding six figures, starting this business was not as savvy as staying in his current job. If there is not enough money in it for you, how will an investor make money out of it?
A budget does not have to be rigid, however. Of course, the idea is once you make a budget, you should stick to it, but you must be open to reviewing and revising it as needed – when the market, pricing, or anything else that could have an impact on the budget you have given your business changes.
The great thing about budgeting is the ability to benchmark performance. Comparing your budget year on year also allows you to implement your key performance indicators if they do, in fact, need revision, as well as comparing figures for growth and projected margins with your market competitors. Remember to always review and revise.
Ultimately, as an entrepreneur, the budget you set out is not just your business's budget – it's your budget. Owning a small business means allowing it to impact both your business and personal considerations. Budgeting your own expenditure could mean the difference between success and failure. So be smart with your startup. Don't cash out before you can cash in.
James Caan is chairman of the Start-Up Loans Company. Each fortnight he will be tackling a different business issue. Keep up to date by visiting the network and signing up to our weekly newsletter. We welcome your suggestions for future topics and questions regarding your own business – please share them in the comments thread below.
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