The budgeting process can be so confusing when you are told to do it before your business is even off the ground.
But let’s look at some of the reasons budgeting is such an important and necessary step:
A budget is a financial map of all your business’ planned activities, and includes the costs of machinery; equipment; marketing vehicles; cash and, most importantly, people’s services.
Budgets should be compiled at the beginning of your business venture, and should be regularly adjusted according to updated information.
Budgets should be used to set financial goals. Without goals for your business, you will not know whether it is succeeding.
Budgets are for measuring success or failure, determining the causes of that success or failure, and re-budgeting for the future.
The only certainty about a budget is that it can never be 100% accurate.
What is a budget?Simply put, a budget is the financial representation of the operating plans for your business. It is your “best guess” for how your business will perform financially over a specified period of time, in relation to your business plan .
How to go about compiling a budget?
For the past 16 weeks, The Springboard Academy has been sharing advice about different aspects of starting and running a new business.
Using all this information, and the tips from our upcoming blog posts, you should feel comfortable with the elements of a business plan and budget.
First things first
How much profit do you want to make AND what do you intend to do with that profit?
Think about the following:
How much do you need to put aside to implement future growth plans for your business?
How much do you need to reward your investors and/or yourself?
How much do you need to plough back into your community; investing in an upcoming entrepreneur or donating to a social need?
Calculate what your monthly turnover will be as a result of the sale of your products or services.Know exactly what your selling price will be, as well as how many items you plan to sell.Determine a mark-up policy - how much you will mark up your goods – which, in turn, will dictate your selling price.
This is the cost of the items you have sold.
The result of the sales and cost of sales is the Gross Profit. Check that the cost of sales figure reflects your planning.
One of the other issues that can affect the GP% is your sales mix.
The next step is to budget for your business’ expenses.
Remember that there are certain costs that you will incur even if you make no sales at all. These are called your fixed overheads, and will only change when your business grows beyond the infrastructure level.
The effects of this step can be seen in the simple graph below, which shows how turnover, cost of sales and fixed overheads relate to one other.
The cost of sale and gross profit follow the path of the sales, whereas the fixed expenses step up at certain levels of activity. The net profit also fluctuates in relation to the other aspects.
The last step of the budgeting process requires the business owner to record the capital items needed for the business to function, such as office equipment, vehicles and machinery for manufacturing purposes.
All the items above will help complete the last leg of your budget, a cash flow forecast.
Make sure to catch next week’s blog post on determining your funding requirements.
Asking for help and advice is not a weakness, but shows business foresight. A business owner does not have to be the expert in every aspect, but should have an understanding of what is required to succeed.
*Contact The Springboard Academy for assistance with any aspect of planning, financing or managing your new business.
**Sign up on our website, send us a message with the reference “budget”, and we will e-mail you a free template to get you started.
Budget for direction, implement for results, measure your success.