No matter how small, businesses have to use budgeting and have a working business budget for good financial management. There are many small or micro companies that operate without a business budget. If they have a budget, they have probably drawn one up for a bank loan or for a business plan to show angel investors or venture capitalists and then forgotten about it.
Entrepreneurs are usually so focused on the product or service they are offering the market that managing finances comes a distant second to them. Budgeting and financial management are not exactly the most exciting things that an entrepreneur can do. It's usually put off as new business owners are busy and don't want to spend much time on financial matters. This is where they make their mistake. Small businesses that avoid the financial details are far more likely to fail than ones that pay attention.
The Working Budget
The term "working budget" means that it is a work in progress. The owner looks at it every day, consults it, follows it, and makes adjustments. It's the game plan for the business.
A working financial budget is necessary from the time an entrepreneur conceives an idea until that idea is put into operation. An entrepreneur can't know if an idea is even realistic for a business without a working budget. For the small business owner, the working budget helps them assess the financial health of the company. The business owner can't know where they are going or what potential opportunities or pitfalls lie ahead unless they have a budget.
What is in a Working Financial Budget?
A working business budget includes the money or sales revenue a company expects to take in and the money it expects to pay out for expenses. A business owner should complete a budget for a year and look at the variances between the budgeted figures and the actual figures. Ideally, the business owner will project a budget out for a couple of years.
At the end of one year, the budget can be adjusted for the second year. If the business needs to apply for a bank loan or wants to take on investors, it will have a ready document to show them. It will actually be a quick look at how the company is performing.
How do you Come up With the Numbers?
If you are an established business owner, you can use your own historical data. If you are a new business owner or an entrepreneur with just an idea, you will need to do some research. For example, you will need to research your sources of income. Who will buy your product or service? How much business do you anticipate your advertising plan will pull in? Have you set the price for your product? You may want to look at other businesses selling a similar product or service before you set your price or answer these questions.
These figures become your income figures on your budget. To be conservative, reduce them by one-fourth. If you are in a recessionary economy, you might want to reduce them by more. If you are in a boom economy, you might not want to reduce them at all.
Estimating expenses is probably easier. You have two types of expenses. Fixed expenses are those like rent. They don't change from month to month. Write down all your fixed expenses. Variable expenses do change from month to month. They would be your utility bills, your advertising budget, and other items. Write down all your variable expenses. Here is a handy business budget worksheet that you can use as a format to keep you organized. Print it out and use it. You can add items to it if you need to or mark items out that don't make sense for your business. After you finish estimating your expenses, increase them by one-fourth. By reducing your income by one-fourth and increasing your expenses by one-fourth, you are being conservative and you may have some money left over for a contingency fund.
What can Happen if you Don't Have a Business Budget?
You could easily go out of business. You have to be sure that you can make enough cash flow and profit from your venture so that you can cover the expenses associated with it. The only way to do that is to establish a budget. The budget gives you some control.
How can I Keep From Making Mistakes?
You can't. Mistakes are how you learn. One thing you can do is make sure your numbers are realistic. Be sure you put in enough detail and all the key elements that should be there for your particular business. Don't make it too general. Don't get bogged down in accuracy, however. Ball park figures are good enough, especially at first. You will learn as you go how to make your business budget work.
Don't put your budget in a drawer and forget about it. Use it daily. Record differences in your income and expenses as the days progress. Your business will run much smoother in the present and the future if you do this.
If you need help, hire a CPA or accountant to help you. You may need a financial professional to do the initial work for you and then you may be able to keep up with it yourself.