For a small-business owner, effective budgeting is indispensable
Overspending on something trivial can create a cash shortfall in those areas deemed essential for helping generate a sufficient level of growth. Nevertheless, nailing down a realistic budget for each area of a venture is easier said than done, and working out a feasible allocation of funds may not be possible until a business is well and truly off the ground. Either way, an entrepreneur who doesn’t have a decent handle on what they can or can’t afford is almost doomed to failure from the outset. Where, then, does one begin when it comes to identifying the places into which to plough the capital?
Understand your market
It goes without saying that the nature of one’s enterprise will dictate where the majority of the dosh is spent. But a decent amount of market research should help a business owner nail down the specifics. “Given that a budget is an allocation of the limited resources you have available, you want to make sure you are applying them in the areas that are going to give you the best return in terms of what you’re doing,” advises Stephen Drew, partner at accountancy and investment management firm Smith & Williamson. “So, rather than just picking a number that you feel may be the sort of number you want to spend, you need to ask yourself if it is properly supportable in terms of what market pricing looks like for that particular activity.” Essentially, it is a case of investing in the areas that are proving must lucrative, suggests Sam Cropper, CEO of eco-friendly car service provider Climatecars. “You need to put your assets into what is going to make people come back and buy from you – or buy from you in the first place,” he says. “Everything else you can cover with sticky tape until you can afford to do it properly.”
Keep an eye on the figures
Budgets are naturally subject to change, so a business owner must always have his or her finger on the pulse of the incomings and outgoings. “It’s rare that people get an accurate budget from day one – you can only ever make your best guess,” says Heather Darnell, founder of financial consultancy Back Office Support Solutions (BOSS). “But you really should be revising and reforecasting based on some real-life data after just a few months.” The use of an online bookkeeping system can aid this process, she adds. Budgets must take also take full account of the cashflow situation, suggests Drew. “Just because you have revenue in January of x, it doesn’t mean you receive your cash in January – you may not receive it until March and April,” he says. “Understanding that dynamic and what impact that has on cashflow is key, particularly if businesses are budgeting for growth on revenue, because often that will mean they need some sort of working capital to enable them to finance that growth.” Drew explains that a proper budget will encompass the profit & loss account, balance sheet and cashflow.
Account for unexpected costs
Whilst most entrepreneurs will believe they have a decent grasp on what is leaving their business account each month, it is always worth setting aside a little extra capital for the more irregular expenses. “I find that lots of people think they know what their costs of goods are but forget lots of the little bits,” says Darnell. “For instance, you may be manufacturing something and you have worked out your cost for piece but you have forgotten to include the cost of the shipping or duty. The shipping cost can vary dramatically, whether you are shipping by air or by sea.”
Set realistic objectives
The crux of effective budgeting is weighing up what you hope to achieve with what you can afford to achieve. Therefore, it pays to bring a healthy dose of realism to the table when it comes to setting your business objectives. “Initially, the key thing with any business – irrespective of what it does or where it is operating – is to put together the operational goals with the financial goals,” says Cropper. “You would be amazed at the numbers of start-ups that fail within weeks, let alone years, just at that hurdle of not matching the financial reality to the operational goals that they are setting themselves. You have got to make sure that what you are aiming for operationally is tied exactly to what it means financially.”
Don’t be afraid to ask for help
Business owners aren’t always the best mathematicians, so there is no harm in taking on somebody to remove some of the stress of budgeting. “I am a great fan of letting people who are good at things do the things that they are good at,” says Raymond McLennan, regional manager for angel investor network Angels Den in Scotland. “I wouldn’t get up in the morning with a great buzz for accounts, but I did have a guy who loved doing accounts, loved doing budgeting and checking the figures – so I would delegate that kind of thing to him.” And McLennan adds that such support is often available at relatively little expense to the entrepreneur. “You can get an accountant and pay them an agreed figure per month by direct debit, or something spread over the course of the year that fits in with your cashflow,” he explains.