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A budget is a financial plan that outlines how much money your business makes and how much you need to spend on essential expenses. It is an excellent way of balancing cash flow: making sure that you spend enough money on your operational needs, without overspending and putting yourself under pressure. It also provides a clear overview of where your money is going if you need to cut costs. Here are six simple tips for kicking off your company’s budget.
1. Know your business’s goals
Every budget has to be tailored to the nature and goals of the business. A freelance designer has very different needs, expenses and aims to a large-scale industrial company with hundreds of workers. Therefore, you can’t simply copy a budget laid out by someone else or found on the internet – you need to know your business intimately and must apply creative though to the process.
2. Collect data
Before you start planning your budget, gather as much of your company’s financial data as you can. If you’ve followed the principles of good financial management, this should be no problem. If your records are lacking, try to find as many financial statements, receipts, bills, bank statements and other information as possible.
3. Estimate your incomes
Working out your income should be easy, since your income comes from your business’s main activity: selling a product or service. Create an estimate of how much you are likely to earn in a month by working out how many products or how many hours or days of your services you typically sell. Try not to be unrealistically generous with this figure, but do take growth and seasonal variations into account. Also include other income streams, like interest earned.
4. Calculate expenses
Below your incomes, create a list of all of your expenses. You can divide these into two categories: fixed expenses are those that you pay every month, and which don’t change from month to month (like salaries, bond payments, insurance fees); variable expenses are those that you pay regularly but that can vary each month (like utilities, transport costs, stationery, marketing). If your company sells a product, calculate as closely as you can the cost for manufacturing it and multiply this by the number of units you expect to sell (detailed in your income). If you have any yearly expenses, divide the figure by 12 and include it in your monthly plan. If saving is a high priority, include the amount you would like to save as an expense, and try to budget a reasonable amount for once-off or ad hoc expenses.
5. Calculate and adjust
Sum up your total incomes and expenses, and subtract the expenses from the income you expect to earn. If the number is positive, it means that you are making an overall profit and can consider spending on growth areas or increasing your saving amount. If the number is negative, you are making a loss: you will need to go through your expenses clearly and see where you can cut costs on non-essential items, or review your income predictions and see if you can push to sell more. Keep working until you find a good balance, and take into account financial growth from spending on items like advertising.
6. Review and adjust
Finally, your budget is not a static document, so you should review and adjust it often (once per quarter is a good starting point) to make sure it is accurately measuring your cash flow. After a few months, you will have a much better idea of your actual expenses and incomes, and will be able to create a more detailed and accurate budget.
The University of Cape Town Basics of Financial Management course starts on 28 March 2011. Sign up before the end of October and pay 2010 fees. For more information contact Karin on 021 685 4775 or karin@getsmarter.co.za, or visit www.getsmarter.co.za
Do you have any other budgeting tips?
1. Know your business’s goals
Every budget has to be tailored to the nature and goals of the business. A freelance designer has very different needs, expenses and aims to a large-scale industrial company with hundreds of workers. Therefore, you can’t simply copy a budget laid out by someone else or found on the internet – you need to know your business intimately and must apply creative though to the process.
2. Collect data
Before you start planning your budget, gather as much of your company’s financial data as you can. If you’ve followed the principles of good financial management, this should be no problem. If your records are lacking, try to find as many financial statements, receipts, bills, bank statements and other information as possible.
3. Estimate your incomes
Working out your income should be easy, since your income comes from your business’s main activity: selling a product or service. Create an estimate of how much you are likely to earn in a month by working out how many products or how many hours or days of your services you typically sell. Try not to be unrealistically generous with this figure, but do take growth and seasonal variations into account. Also include other income streams, like interest earned.
4. Calculate expenses
Below your incomes, create a list of all of your expenses. You can divide these into two categories: fixed expenses are those that you pay every month, and which don’t change from month to month (like salaries, bond payments, insurance fees); variable expenses are those that you pay regularly but that can vary each month (like utilities, transport costs, stationery, marketing). If your company sells a product, calculate as closely as you can the cost for manufacturing it and multiply this by the number of units you expect to sell (detailed in your income). If you have any yearly expenses, divide the figure by 12 and include it in your monthly plan. If saving is a high priority, include the amount you would like to save as an expense, and try to budget a reasonable amount for once-off or ad hoc expenses.
5. Calculate and adjust
Sum up your total incomes and expenses, and subtract the expenses from the income you expect to earn. If the number is positive, it means that you are making an overall profit and can consider spending on growth areas or increasing your saving amount. If the number is negative, you are making a loss: you will need to go through your expenses clearly and see where you can cut costs on non-essential items, or review your income predictions and see if you can push to sell more. Keep working until you find a good balance, and take into account financial growth from spending on items like advertising.
6. Review and adjust
Finally, your budget is not a static document, so you should review and adjust it often (once per quarter is a good starting point) to make sure it is accurately measuring your cash flow. After a few months, you will have a much better idea of your actual expenses and incomes, and will be able to create a more detailed and accurate budget.
The University of Cape Town Basics of Financial Management course starts on 28 March 2011. Sign up before the end of October and pay 2010 fees. For more information contact Karin on 021 685 4775 or karin@getsmarter.co.za, or visit www.getsmarter.co.za
Do you have any other budgeting tips?
