Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
A lot of small business owners face challenges that range from time constraints, poor cash flow to a lack of planning and control. As demotivating as these challenges may be, you need to shift your mind set to view this as an opportunity to improve your financial situation.
One of the most important tools any business owner must use is budgeting. Most businesses have implemented a form of budgeting, but if it is done correctly, your business will have a constant GPS reminder of where you are heading. The most common form of budgeting is financial budgeting. You can also implement a budget for projects, personnel and even time spent in your production and service delivery.
You will think that financial budgeting is a common used business tool. More often than not I encounter small businesses that do not use this tool as effectively as they should. The best way to begin is by using past income and expenditure trends and setting up a forecast. You need to know your projects, direct sale costs, your personnel requirements and have an idea of past and future trends. Do not hesitate to incorporate your employees into this process as more involvement will help to get a holistic view of each process in your business.
Your financial budget will alert you when you are deviating from your plan, where attention is needed and even assist you to forecast future scenarios. The longer you have a budget, the more useful information you will be able to gather.
"A budget is telling your money where to go instead of wondering where it went" - Dave Ramsey
One of the most common constraints that I have encountered by doing consulting work for my clients is that they manage their projects blindly. There is no clear management of materials, staff allocations and even the basic costs related to these projects. You simply cannot expect to make optimal profit on a project if you cannot project these factors beforehand. You need to sit down and analyse your projects and determine what each unit will cost. How much time you will need to complete which tasks and how many staff members are needed to be assigned at what cost and ratio.
By implementing a project budget, you will be able to analyse past projects, see where you have over spent and even determine what went right. You will be able to project proper quotes for clients and manage each project at optimal level.
It is important to include a personnel budget as they are a great focus point in business. As a small business you will have an advantage here. You can ask yourself what output is needed, how many employees you need, and at what cost will these employees make sense to put on the payroll. Implementing this type of budget measures your employees’ progress and the output you require to satisfy your customers. When employees lack in skills or resources, your personnel budget will highlight these issues and the needed attention can be focussed on training.
Another factor to determine here is skills vs wages. Do you need to pay more for a skilled employee that gets more done or do you pay a lot of workers at a minimal wage in mass production? What is the short term and long-term goals for service delivery and growth. By determining this you can start recruiting personnel and put them in the relevant roles to help grow your business. It is all about planning ahead and implementing a form of budget to guide you and let you know when you are going off the tracks.
A budget document is a document that will indicate change or where and when change is needed – like a good GPS reminding you to recalculate your route.
But change can also carry risk. Proper budget planning and risk management go hand in hand. Under budgeting and over budgeting can pose risks but they can be avoided. So spending some time on a risk analysis plan and including it in your budget planning will ensure a more accurate financial forecast for your business.
Using a budget, you can have a clear guideline of where your business is heading. This will also assist you to make better management decisions, project management and it will serve as a reminder when you are going in the wrong direction. Start looking at your challenges in a positive way and implement one of the best tools your business will ever have.
Luan van Rhyn is a registered Professional Accountant (SA) and Chief Dreamer and Founder of Calypso Accounting. Luan and his team are passionate about helping SME’s grow and streamline their businesses and are continuously looking for ways to help improve their clients’ bottom line.