A lot of small businesses are missing the importance of budgeting ahead.
The reason why businesses budget, is to set long term goals for themselves and to track the progress to ensure they are achieving what they set out at the beginning of the year.
Use it for anything, ie build up the business to make a decent living for the shareholders, improve the balance sheet position, take over a global market, the choices are yours. Plan for them.
Here are some simple ways of budgeting and forecasting the year ahead.
There are two ways, a long term fixed budget, set out at the beginning of the year and then track when the actual figures come through, or a rolling budget which means once the month is up you roll ahead to the next month, so you are always looking at least a year ahead.
Set yourself some goals you would like to achieve over the next couple of years, and set out how you are going to achieve them. This could be in note form or a more detailed report.
Set yourself realistic goals to achieve for your sales turnover. A top down approach. Use last year as a guide plus a percentage for growth or inflation.
This method is a great way of keeping the costs under control.
A bottom up approach, is more loose in that you put in your costs, and set the targets of sales that you have to achieve to pay for everything. It can make targeting sales more difficult as costs are not as controlled.
Cost of Sales
If you have been running your business a little while you might have these figures to hand as a percentage of turnover. If not then a costing exercise can be done to work this out.
Put everything in to this and spread it over the next year. Ie rent, wages, advertising, heating, office costs, travel. It all goes in here. Split it out by category so that you know what you’re spending on what.
If you are doing a yearly one, spread these costs over the 12 months.
If you are aware of seasonality fluctuations make sure they are apparent in your budget.
Starting off with the profit and loss budget is a good way to start, if you are feeling confident then set up a balance sheet forecast and a cashflow one too. If they are all connected together, you will always know ahead of time what your financial position is going to be. There is some great software in the market that can help you with this.
Now use this template to put in your long term goals. If you are looking to purchase equipment, or taking on new staff for a project, a new sales contract.
You may have to increase sales to achieve these goals, but set targets. You may have to increase your advertising spend, or take on more staff, take this into account.
Once your budget is done, then as the months pass and you know your actual income and costs. Put them into the spreadsheet.
If you are not quite making the targets, look into the cause of the fluctuations, to get yourself back on track.
This blog is intended for information purposes only and is only advice from past experience, you may have other suggestions of your own. It is not intended to be used to make all of your business decisions but as a guide only.