Budgeting for your business can take time and effort. In the business world, market trends change quickly, products come and go, and customers can be extremely fickle.
Having a budget that predicts market changes is essential for several reasons. It helps you prepare for surprises, promotes growth and adaptation, and is vital for long-term success.
But what should business owners be looking at?
This guide will explore creating a budget that works for your business, including fixed and variable costs.
1. Look to your past to forecast your future
The secret to the future of your business lies in your past.
Looking at how your business has operated over the months or years before is one way to predict what will happen in the future.
By analysing the data, you can extrapolate what is likely to happen at the same time each year.
2. Build a calendar
Start building a calendar for the year once you've logged and analysed the data.
Include elements such as:
- Highest sales periods
- Lowest sales periods
- Problems you had with obtaining new stock
- Concerns you had over staffing
This calendar can help you plan ahead and spot trends in your business sales. With a well-thought-out calendar, you can track your sales activity, as well as find patterns in other areas of your business. Tracking and analysing this data will help you thrive during positive economic upswings and adequately prepare for the bad times.
3. Be prepared for fluctuations
It's crucial to ensure that you have a contingency for seasonal fluctuations in your sales.
An extreme winter storm could negatively impact your sales for a month.
The outbreak of political conflict could destabilize the economy and affect your customers' buying power. You should always have a plan for combating these types of events with an emergency fund.
4. Create a sales budget
A business budget is more than just one document. The first element of it is a sales budget.
Break down expected sales figures per month for the year ahead. If you know your business's past, you can project your future annual sales revenue. This ensures that it doesn't come down to vague guesswork.
When preparing a sales budget, ensure you refer to the same period as the previous year. You should also consider the market factors that could impact sales in the world today. Consider market factors that are both local and global, and set goals that are realistic and inspire optimism in your business.
5. Prepare a growth estimate
The goal of any business is to grow their profits. You could develop into a large company with multiple branches or remain a small family business. Either way, growth is an important factor that you'll need to consider.
Firstly, you need to keep up with inflation and be aware of the market forces at play.
Secondly, you want to ensure that your business allows you to live a financially comfortable life.
Including an estimated growth rate should always form part of creating your sales budget. It's also helpful to estimate what your costs include, should you wish to expand the business.
6. Work out your profit margins
The next part of your overall small business budget should be to work out your profit margins for each product or service you offer. A profit margin shows you how much sales revenue your business can keep as profit after costs are deducted. For example, if you had a gross profit margin of 80%, you'd keep £0.80 for every £1 earned via sales.
It's crucial that you understand profit margins. There is a big difference between gross profit and net profit, which, when calculated, will give you a better idea of the profit you are making. You can't create a realistic financial overview if you know your margins.
7. Draw up a cost budget
To better understand your profit margins and what your business requires to operate, you need to have a cost budget. This is where you list all of your fixed and variable costs. It should detail more than the money required to buy stock. It also includes storing and moving your inventory, staff, premises, marketing, and other business costs.
It's helpful to look at your actual costs as well as the industry benchmarks for various elements of your business. If you compare your running costs to those benchmarks, you can see if your business is still competitive.
8. Design your cash flow forecast
Your cash flow forecast is the next vital document in a budget for SMEs.
Based on your expected income and costs, you can calculate how much money your business will have every month.
Knowing what your cash flow looks like will give you an understanding of what you can afford.
9. Take control of your inventory
Inventory management is one of the most critical parts of any SME.
You should be aware of your stock holding at all times. Mismanaging your stock in either direction—too much or too little—can have major repercussions for your cash flow and your business reputation.
Aim for a balance in your stock levels. This means having enough stock during busy times and not having too much stock during slow times.
10. Give your business breathing space
Finally, you must ensure your budget has enough breathing space for unexpected costs. This could be unexpected repair bills for essential equipment you use, a rental increase, or even a VAT bill.
It's vital that you have funds set aside or a line of credit that's open should an emergency arise. Don't wait until you need additional finances before you find a business loan or line of credit. Knowing your options well in advance makes it easier to secure funds. Plus, it offers the peace of mind that comes with knowing that you’re covered when your SME experiences a dip.
Taking control of your business budget
Effective budget management means that you can choose how and when to scale your business. Whether you want people to invest in stocks in your business or you want to run a small but powerful enterprise, effectively managing your budget will put you in control.
Moreover, handling your budget smartly not only puts you in control of growing your business your way, but also gears you up to tackle any unexpected curveballs with confidence.
By understanding exactly what's coming in and going out financially, you can set aside funds to navigate tough times, like economic downturns or surprise expenses. This kind of financial preparedness empowers you to stand strong in adversity, ensuring that your business not only weathers the storm but thrives in the long run.
In essence, managing your budget effectively grants you the freedom to chase growth opportunities while fortifying your business against potential setbacks. Ultimately, it leads your business on a path of success and resilience.