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January 27, 2013Have you completed your financial budget for the new year? Have you allocated enough money for growth initiatives you have planned? Are you trying to contain costs in specific areas? Can you achieve your revenue growth estimates? Creating a budget that helps you manage cash flow and achieve your business objectives is a very important component in enabling growth for all small business owners.
Budgeting is an essential process that small business owners can utilize to help them plan and forecast future revenue and expenses. Doing this allows them to make sure that enough money will be available to keep their business running, improve their competitive position in the marketplace and achieve their growth objectives. Budgeting is also an important management tool because it helps guide decision-making based on financial metrics, not opinions.
Creating an accurate and reasonable budget enables forward-looking planning, and also allows specific financial targets to be set. It is always a good idea to overestimate expenses and underestimate revenue growth when you are creating an annual budget. Most expenses, such as fixed costs, are predictable. Fixed costs are not dependent on the level of goods or services produced by the business, and are a good starting point in budgeting expenses. Variable costs are less predictable. They are based on expenses that change in proportion to the activity of a business. For example, as revenue increases, the commission paid to sales people will also go up. Aligning variable expenses to revenue growth will help ensure cash flow is maintained.
Revenue budgets are an annual forecast of what will be sold, billed or collected. The starting point for this is typically based on the previous year's performance. Every small business owner wants to grow sales, and it is not uncommon for them to arbitrarily set a revenue budget that is a certain percentage higher than the previous year. If they are not investing in sales improvement initiatives, this may be hard to come by. Conversely, if they are looking at improving their sales process, implementing enabling technology and improving the skills of the sales team, budgeting higher revenue goals is much more reasonable.
Maintaining the budget throughout the year is also very important. Identifying over- and under-performing areas, both on the expense and revenue side, will allow you to adjust budgets before they are "out of control." It will also allow you to recapitalize budgets that are performing well. For example, if a marketing program is doing well in growing sales and was underfunded, reallocating budget dollars may be a wise idea.
Creating and maintaining financial budgets is the cornerstone of managing a small business, maintaining cash flow, measuring performance and avoiding surprises. Spending the time to create and maintain a budget will help you to grow your small business.