Here's why plan a budget is important for small business entrepreneurs: No matter the industry, market fluctuations can signal volatile waves for SMEs. Big fish can weather the storm, but small fry will always be hit hard by tides of change; the ability of your business to sink or swim will often depend on both external and internal factors.
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But fear not- while external factors are out of your control, savvy entrepreneurs can harness internal factors to their advantage. In particular, the instability of the external climate can be managed and offset by a crucial internal factor: how a business plans its budget.
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Budgeting is a process that requires teamwork, both in planning and implementation, so that operations can run effectively. A budget is usually made on a yearly basis per standard financing practice. So set out to plan your budget before the beginning of each financial year- and ideally, as a team effort!
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Let's look at a few easy tips for small business to make a budget plan:
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Budgeting basics for small business
A budget provides an overview of expenditure plans and income predictions over a period of time. When you're planning your budget, you can adjust expenditures and incomes so it doesn't lead to losses or growing debt.
In the year ahead, you should use your business budget as a guide to managing expenditures within their set limits. If you can ensure your company complies with its budget, you can be sure to meet your financial targets.
Here are the 3 key elements of a budget:
1. Sales
This is an estimation of all income from various sources in the future.
2. Total cost
These are the funds your business requires to generate sales. This includes fixed costs, variable costs and semi-variable costs.
3. Profit
Quite simply, profit is sales minus total costs.
Estimate income
Having nailed down the basics, the next step in planning your budget is estimating income.
A caveat to remember is that these income estimates may not always be accurate. Always err on the side of caution: it's better to project the lowest and most realistic income estimate, instead of the highest and most idealistic prediction.
Here are four tips for producing accurate predictions:
1. Determine estimated sales volume
Estimated sales volume is how much of your good or service you plan on selling. If you have already secured a contract or subscription, you can simply enter the number in the budget plan. Otherwise, you can make use of the following tips to guide your estimate.
2. Consider your position
Consider the market position of your small business. Depending on the age of your company and the data available to you, you might use some or all of the tips suggested. Additionally, considering the competitive mapping of your product offering can help you harvest crucial insights from competitor data.
3. Use past data
If your business has been running for several years, the best way to estimate present income is to look at past data, adjusted to changes in the upcoming year. What market trends or external factors can be accounted for in projecting a higher/lower income estimate? It's a good idea to consult your customer-facing employees on the field, so you can get an accurate gauge of market sentiment and consumer trends.
4. Conduct market research
For entrepreneurs just starting out, market research is especially crucial. First identify similar businesses playing in the same market, then make an estimate of your sales volume vis-a-vis your competitors. Make sure you collect information on the price and quality of competitor goods or services, and use those benchmarks to estimate your potential income.
Prepare the budget
The final step, of course, is to start making and preparing your budget estimate. Online resources provide free templates that can be download and custom according to your budgeting needs. After finding the right template, you can start by filling in the following points:
1. Target profit margin
The target profit is calculated by reducing total estimated income to total expenditures.
2. Determine fixed costs
Fixed costs are costs which generally remain the same for a period. Examples are annual building rental fees, insurance, and building taxes. Estimate the increase that might occur in the following year based on projected market fluctuations and inflation rates.
3. Take into account variable costs
Variable costs are the costs of raw materials that are directly proportional to sales. These costs are usually easier to adjust within the period.
Consider semi-variable costs
Expenditures in this category are considered more or less stable, but with some possibility of change. Examples include the costs of telephone and internet services or employee salaries. For instance, employee salaries are labelled as semi-variable costs. They may fluctuate if the employee has to work overtime and warrants a higher salary.
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Evaluate your budget
After adding these three costs (fixed costs, variable costs, and semi-variable costs) together, you'll get the total budget you need to run your small business. Evaluate whether the total budget matches the total estimated income. If the value of your target profit is lower than the estimated budget, you'll have to make savings somewhere in your business.
Alternatively, you can also shift your business strategy to accommodate your budget and grow your projected income. For example, you might consider relocating to a more strategic business venue, pushing new innovations to attract consumers, or strengthening the marketing of your products.
Of course, these profit-generating activities will incur additional costs in the process, and might require capital injection into your business. Having weighed the costs and benefits, you might consider applying for a business loan. But make sure you've given due thought to how to allocate the funds, and how to repay the loan. Online loan services are available to provide a virtual line of credit that you can draw down from at any time.
Adjust and adapt
We've shared some practical tips and tricks you can utilize to develop a budget for your small business. It's important to have clear and specific business goals in mind, so you can plan towards them in the year ahead.
But here's a pivotal piece of advice: Your budget isn't set in stone especially as a small business entrepreneur. While it should serve as a guide in the upcoming financial year, you should treat your business budget as a plan that's flexible and adaptable. Experienced entrepreneurs know you should always plan for the best, and prepare for the worst! If something happens along the way, make sure to change the budget to suit the best solution for your business.
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Frequently Asked Questions
