Although formal budgeting and forecasting are thought to be reserved for, and only needed by “BIG Business”, they are important tools in growing your small business too. We often think of budgets as very time consuming to develop, complicated and we may even think of them as a waste of time. But before you write them off as worthless, let’s explore what they can do for your business. We’ll also look at 5 budgeting tips to help drive your business down the road to success.
Do I REALLY Need a Budget?
One of the reasons that small businesses fail, is the failure to plan. Market conditions, new competition, the outcome of the coming presidential election, the weather, the rise and fall of interest rates. These, among many other factors, can have significant impact on our businesses. Yet, for the most part, we have little to no control over them. Having so little control over critically important factors that can determine whether our businesses succeed or fail can be frustrating to say the least and may tempt us to throw up our hands in surrender. But I’m here to tell you that having a plan, a solid budget, that is well thought out and flexible can help you navigate your business through stormy and uncertain times. No, it’s not your crystal ball and no, you don’t need a crystal ball to prepare one. Think of it this way, trying to run a business without a budget is like trying to sail a ship without a map. You can do it, it’s just much riskier. You may hit an iceberg before you realize that there’s an iceberg in your path.
5 Budgeting Basics
Your budget is your map to the future. You know where you are today. Right? But where do you want to be in the future, say 12 – 18 months from now? And, once you figure out where you want to be, how will you get there? That’s where your budget comes in, it’s your map.
1. Take Inventory of Your Environment
Knowing the environment that your business operates in and anticipating the changes that may happen to this environment will help you make sure that your budget (your map) is well thought out. You may decide in this step that you need to make a change to your business. Now’s the time to consider this. In this step, take stock of the significant risk factors that may affect your business. Consider the impact on your business of an increase in the minimum wage, changes in the interest rates, new technology, and the entrance of new competitors. This is the landscape of your map.
2. Determine Your Destination
Now that you’ve taken stock of your environment and you know the risks you’ll be facing, take a deep breath and determine whether you want to plan to grow your business. If growth is where you want to be, quantify what that means to you. Does growth mean an increase in customers, increase in revenues/sales, launching a new product or increasing your profit? Consider this your destination.
3. Sketch Out Your Sales Volume and the Driving Forces Behind Your Sales
If your destination is to grow your business, determine where this growth will come from and how it will impact your sales volume and revenue. If you’ve got historical experience in sales and proven marketing strategies, you can leverage this information to help you prepare your map to the future. Although this is a good strategy, I would caution against strictly using historical performance to forecast future results. Always consider your environment inventory when determining your projected sales and revenue growth. If possible, prepare “best”, “worst” and “most likely” cases. This will help you see the impact of changes in sales volume on your business and you can track your actual results to these cases. This will be your main road on the map to your destination.
4. Plan for Your Expenses
Now that you know what your sales plan will be and how you intend to reach this goal (marketing, acquisition, new product launch, etc.), you can start layering in the expenses that will be incurred to drive your sales volume and your business operations. Things to consider here will be marketing spend, sales commissions, purchases of product to sell, costs to develop new products, salaries, taxes, rent, utilities, supplies, dues and subscriptions. You get the picture. Here again, if you’ve got historical data to work with, that would be great and will help to make sure you don’t leave anything out. Regardless, I would highly recommend adding in a percentage of your revenue or a flat amount as a cushion for the unknown. This is the construction materials that go into your main road on the map to your destination.
5. Communicate Your Plan & Consult It Regularly
Communicate your budget (road map) to your staff or other stake holders. Get their input and revise it as you see fit. Your budget is your map to the future. Don’t put it down on paper and file it away, take it with you as you journey to your destination, it will help you stay on track and succeed. Use your road map and it will guide you to success!
There you have it! 5 budgeting tips for your success. Now go out there and budget with confidence.
© Susan M Nieland, CPA