A business without a working budget is like a car without a fuel gauge – it will drive for a while, but will run out of fuel when the driver least expects it.
This is a statement from Gerrie van Biljon, executive director at South Africa-based Business Partners Limited, who provides small and medium enterprises (SMEs) with six essential tips for sound business budgeting.
The basis of every budget is an estimate of the income of the business. The more accurate the revenue estimate, the more strong and useful the budget is for the business owner.
Van Biljon said however that the income estimate is often the portion of the budget that business owners get wrong. “As most entrepreneurs are optimistic by nature, they tend to overestimate projected sales.
A budget with overstated income can be just as bad as having no budget at all, as it gives the business owner a false sense of security that budgeted expenses will be covered.”
There are a few ways in which entrepreneurs can produce realistic revenue estimates, one of which is to base future sales on historical sales data.
“Any deviation from past sales must be based on realistic factors. When the economy falls into a slump, for example, it is dangerous to estimate that your sales will increase in the coming year,” he said.
He recommended that business owners have two budgets – one for when things go well, and another for when the things turn bad, which should include a ‘break-even’ scenario and reflect the minimum sales required to meet overheads and keep the business going.
Keep it simple
Business owners don’t need a fancy app or expert set of skills to draw up a budget. Van Biljon said budgeting is a basic exercise that every business owner can do on a simple spreadsheet with three columns – budget, actual and variance.
“If you know your way around your accounting software and it allows you to draw up a budget, use it. But a simple spreadsheet is more than enough for managing your budget.”
Do it yourself
Accountants are useful for helping business owners with tax and financial statements, but business owners who leave budgeting to their accountants are probably over-reliant on them, he said.
“The business owner has the best knowledge of expected levels of sales in upcoming months, as well as the expenses that will need to be incurred to meet those sales.
If business owners cannot draw up their own budgets, they can ask their accountants to assist, but they must understand what the accountant does and how the budget works.”
Do it regularly
While large corporations go through an annual budgeting process, it is probably better for SMEs to rethink their budget more regularly, as their resources are less likely to cover sudden external or internal upheavals.
Van Biljon said a budget drawn up for the next quarter is invariably more accurate than one drawn up for the next twelve months.
“Whatever the frequency of the budget-planning process, it is important that any business compares its actual sales and expenses against the budgeted amounts at least once a month. If not, sales dips and rising expenses will only be noticed once it is too late.”
Budget for your extra cash
Budgeting is not only to prevent death by cash-flow crunch, but also to help entrepreneurs plan for what to do with extra capital.
“Sensible budgets include plans to invest extra cash into accessible short-term money market accounts, for example, or into long-term investments, such as buying the building from which the business operates if the entrepreneur is sure that income and profitability can be sustained.”
Be ready with Plan B
Over and above break-even budget mentioned before, sensible business owners should have a plan for when their budget, even their break-even budget, suffers a major knock, such as if a major client goes bust, a fire or break-in disrupts production, a key staff member quits, or an aggressive competitor suddenly emerges.
“Entrepreneurs have the temperament to live with such risks. The best entrepreneurs plan for such possibilities, and always keep their budgets close at hand.”