What is the first thing you think of when you hear the word “budget?” If you are like many small businesses I work with, you probably cringed.
Well, don’t cringe anymore. You don’t have to be a certified public accountant, financial wizard or Microsoft Excel genius to create a useful budget for your small business. Budgets are not foolproof but necessary if you want to scale your business.
So why are budgets important to the success of your small business?
A budget is a financial forecast to help you estimate your income and expenses for a given period of time. Your budget also allows you to plan for necessary expenses to run your business. Budgets help you estimate the taxes you will owe the Federal and state government, determine your business cash flow needs, and evaluate whether you can buy new equipment or new office space.
As you plan for 2017, here are seven budgeting tips to consider:
1. Plan large purchases by order of importance
Think about what large purchases – from equipment such as computers to new office space – you may need this year and set aside funds. Doing this exercise is a major component of good cash flow management.
2. Revisit the relationship between expenses and sales
In other words, review your largest expenses to understand how they contribute to sales. If you purchase new equipment, ask yourself how using it will add to your bottom line. Doing this will help you justify and prioritize purchases.
3. Effectively communicate to employees
Make sure your employees are aware of how expenses impact the bottom line – favorably and unfavorably. If you need to decide between purchasing new laptops (that everyone would want) or expensive office equipment such as furniture, it is important for your people to know how such decisions impact the bottom line. Employees who understand the goals can help the business achieve them.
4. Monitor your budgets
Revisit your budget on a monthly basis to determine whether your business is on track to overspend or underspend this year.
5. Compare budgeted numbers to actual
There’s a saying that every small business owner should remember: “What gets measured gets accomplished!” Compare your year-to-date progress to what you budgeted to make sure your goals are on track. You will have some insight on the reasons if your numbers differ from the actual amounts.
6. Cushion the pending fall
"No business plan survives the first contact with customers," says serial entrepreneur and Stanford University professor Steve Blank. In my experience, budgets generally don’t survive either – something always gets more expensive. It's imperative to create a cushion (room for overages) in the event you underestimated expenses for the year – and make it a given something unexpected will pop up.
Related article: Smarter Tax Moves for Small Businesses
7. How much will the largest expenditures really cost?
Get firm commitments or quotes from vendors for your large expenditures for the year. If necessary, sign contracts to ensure those costs. Budgets are important because it helps you determine how much cash is available and how much is available for new projects or expanded business goals.
Additionally, banks and investors may want to see your budget after they ask, “What will you do with the money we give you?” Investors want to know their funds will be put to good use and a budget will show how their funds will be maximized.
Whether you want to sign a new office lease, buy new equipment, hire employees, acquire a new business loan or estimate your business’ expected income and profits, budgets are not only important but necessary tools for a thriving and healthy business.
About Ebong Eka
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”
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