I remember learning about budgeting for small businesses when I was at college and considering it all rather trivial. It’s quite different when you have to carefully consider budget matters for your own startup and I found the task quite daunting at times.
Before you approach potential investors or financial institutions in an attempt to get finance for your business, every single one of them will want to see your business plan and your budget in particular. You can’t blame them for asking, after all, it will be their cash that will get you started and they all want to make sure that you understand basic business finance and are familiar with the sector you are establishing your business in. While you will also be asked for financial projections, the most integral part of your business plan is the budget.
To take the sting out of budgeting, I am outlining the different items you need to include and explain what a budget is ultimately needed for.
Budgeting – Basically Just Common Sense
It’s all common sense really, a budget is a framework within which you ensure that the income your business creates is higher than the amount of money you spend running your company. Much like with a household budget where you make sure that all expenses can be covered by your income and leave you with some disposable cash, business budgets have the exact same function.
If you haven’t started selling your services or products, you will need to estimate your income. This can be quite difficult and requires detailed market research. Projections are an integral part of preparing a business plan and you are just going to have to sit down and produce some realistic sales projections.
The Two Sides of a Budget: Income and Expenses
Budgets are usually compiled for a 12 months period and in essence, on a budget, the money you make is put against the money you spend making it.
Income
On the income side you will have to produce a figure that is either estimated by using past sales figures or by making sales projections. You will never get it 100% accurate, but you can have a fairly good idea of what your income will be.
Expenses
One of the most commonly made mistakes is to leave out certain expenses and find yourself caught out at the end of your budgeting period. It is therefore vital to include absolutely every possible expense you can think of.
Product providers must first and foremost include the cost of production, for instance a baker will have to calculate how much it costs to produce 10’000 loaves of bread, how much the ingredients will cost and how much wage and electricity costs will arise.
Service providers do not have to buy or produce a product and need only consider the actual running costs. These costs naturally also apply to product manufacturers. The main areas of expenditure are:
- Fixed Costs:Fixed costs are always the same and include items like rent, licensing fees, loan repayments, wages etc.
- Variable Costs: This list will include practically everything from heat, power, telephone, internet, advertising, marketing, petty cash, petrol and motoring expenses, office administration expenses, computer and equipment costs, maintenance and repairs and all other day-to-day costs.
Once you carefully add all the costs you will have a good idea of how much it costs to run your business.
Making Sure it All Adds Up
If you find that your expenditure is higher than your estimated income, you will either have to reduce your costs or increase the prices you charge for your products or services. One of the most important things is to pitch your prices correctly so that you have a sufficient profit margin.
What A Budget Will Do for Your Business
By budgeting you ensure that you are running a profitable business and make some financial gain at the end of each year. Budgeting is absolutely necessary and in actual fact quite easy.