Could you imagine if everyone in your company could spend as they please, without any regard to the amount of money that the company may or may not have? Usually companies that don't establish small business budgets will inadvertently spend without limit.
Why Small Business Budget Are Necessary
Small business budgets are fundamentally necessary and quite common in maintaining small business finances. They are essentially used as a road map that provides basic instructions to a small business on how they will spend their money. All aspects of the business budget should be planned within a certain period of time (usually one year), and the details of the plan are revisited periodically so that the business can stay on track with the budget. Most of all, small business budgets are designed to implement limits on spending. Could you imagine if everyone in your company could spend as they please, without any regard to the amount of money that the company may or may not have? Usually businesses that don't know how to start a business budget for a small company will inadvertently spend without limit and then will find themselves facing bankruptcy rather quickly.
Initial Steps to Start Your Small Business Budget
If you are planning to create a business budget for your small business, here are the key steps on how to start a business budget for a small company:
Business budget planning begins with taking a look at all your known income sources, as well as your expenses. This will give you a realistic view as to your financial position, and a trending pattern of all of your peak business seasons throughout the year. Being able to foresee your seasons will help you make adjustments as to whether you need to hire additional employees, etc.
Moreover, it is important to note that building a solid business plan should not be an isolated aspect of your overall business operations. All departments should be linked back to the budget plan, as they too play a vital role in staying on budget. For instance, every department should take responsibility for their own individual budget in order to meet their goals for the entire company. The best way to achieve this is to get your management team involved, and hold them accountable when their departmental budget goals are not met.
Some business owners have been guilty of reevaluating their business budgets only towards the end of the year. This is an extremely risky strategy because you could be in deep financial trouble and not know it until the end of the year. Therefore, it is vitally importantly that you revisit your business budget at least once per month so that you can stay on track throughout the entire year.
Don't Overlook These Crucial Steps
The reason for evaluating your business budget is so that you can make revisions to your operations in order to meet your budget goals. This is called “controlling your business budget". Essentially, controlling your business budget is a way to make adjustments to your business operations based on your budgeting goals. For instance, if you made less income than you reasonably expected, then you can take action in order to either increase income or decrease expenses without sacrificing productivity. This will keep you on track with your goals as you continue to operate throughout the year. Also, by controlling your small business budget, you can make an educated assumption as to whether other forms of capital will be needed in order to fund your daily operations.
4. Plan Conservatively
I added this final step to the budget model because I felt that it was vitally important and should be mentioned in this article. The problem with small business budgeting is that most people do not plan conservatively. They are too busy hoping and wishing for their own personal “cash cow", instead of realistically looking at the facts and then planning accordingly. The Small Business Administration stated that many small businesses that fail lack these four essential qualities:
- Sound management practices
- Industry experience
- Technical support
- Planning ability
Specifically, in this section, we are going to deal with the fourth point, “planning ability". Your ability to plan during your initial years of business is going to be crucial to your success. Statistically, most new businesses fail within the first year of their opening. Most often, this is due to lack of capital, which stems from business owners not planning conservatively when it comes to business income projections. It is a well known fact that many business owners don't even reach their break-even point until a year or two later. Therefore, it is essential that all business owners take a hardcore look at how much investment capital will be needed, as well as how much income will flow-in from operations. Lastly, if you decide to get a business loan, lending institutions will expect practical and reasonable figures only, not wishful income projections.
Image Credit: freedigitalphotos/Michelle Meiklejohn